analysis of the turkish general insurance market a d jarvis

2010

By Alexander D. JARVISBlog: www.alexanderjarvis.comTwitter: ADJBlog

AGENDA

1. Competitive Comparison

2. General Insurance Industry Overview Of Turkey

3. General Insurance Underwriting Analysis

4. Overview Of Underwriting Ratios In Turkey

5. Developing General Insurance Underwriting Competence

6. Expansion Options To Gain Market Share

NOTES1. Presentation is focused on general insurance

• Defined as all insurance excluding life and pension. Excludes GI generated in non-life companies2. Data set

• As of the end of 2009 there are 57 companies operating in the market. Out of 56 insurance companies, 33 of them are licensed in non-life insurance, 9 in life insurance and 14 in pension/life business. There is only one licensed reinsurance company in the domestic market. In addition, there are four non-life and one life insurance companies licensed but currently not in operation for variety of reasons.

3. The report covers data for general insurance companies as follows: 25 explicitly and 13 grouped into “Other” Arranged in two groups by 5 year trailing average net earned premiums (“NEP”) • Group one is largest 13 companies• Group two is next largest 12 and Other (Grouped under “Remainder”)

4. Data aggregation/cleansing• All companies have been aggregated on a trailing basis for acquisitions to provide consistency over time (i.e.

Acquirer includes target data in prior years)• Government data set are not 100% accurate and errors have been corrected with best estimates, as found

5. NEP is used throughout presentation meaning Expense Operating Ratio is calculated on a financial rather than solvency basis (which would use Net Written Premiums)• Calculation: NWP- Change in Prov. for Unearned Premium - Change in Prov. for Unexpired Risks

Group 1 Ave. Earned Premium Group 2 Ave. Earned

Premium Remainder Ave. Earned Premium

1 AXA 832.25 14 Ankara 99.46 1 Euro 7.592 Anadolu 758.86 15 Zurich 79.92 2 Bati (Liquidated ‘09) 6.463 Allianz 488.83 16 Chartis 79.27 3 Cardif 2.264 Groupama 429.62 17 HDI 68.16 4 Atradius 0.375 Yapi Kredi 405.60 18 Birlik 67.71 5 Demir 0.316 Ergo 390.73 19 Isik 61.65 6 Turk Nippon 0.127 Aksigorta 378.35 20 Liberty 49.44 7 Rumeli (*) 0.088 Gunes 292.44 21 Hur 34.51 8 Other 0.019 Mapfre Genel 198.89 22 Generali 29.09 9 Magdeburger (*) 0.0010 Eureko 176.44 23 Dubai Group 13.77 10 Merkez (*) 0.0011 FIBA 166.26 24 SBN 13.20 11 Inter (*) 0.0012 Aviva 158.60 25 Coface 11.51 12 Neova 0.0013 Ray 136.40 26 Remainder 16.90 13 Ace 0.00

Total 16.90Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. (*) Licenced but Inactive Insurance Companies. Note: Other under Remainder is a provided grouping

EXECUTIVE SUMMARY

• Whilst without difficulties at both a political and economic level, and underdeveloped compared to the banking system, Turkey has experienced phenomenal growth in the general insurance market, buoyed by a young and growing population, EU ascendancy and GDP growth

• GWP have outpaced the growth of almost every other nation, although of late this growth has stalled• Fierce competition from foreign entrants has aided the market development (FDI was key) but has

meant that seldom few companies have made underwriting results in the preceding 5 years• Few domestic companies continue to go it alone• Given growth prospects in home countries, it is unlikely that competition driven by foreigners will

abate in the short term• The legal framework around insurance is creating opportunities, but also encouraging competition

• Competition has further intensified in TPL vehicle insurance following the introduction of ‘free’ tariffs (Pricing flexibility) in 2007

• Efforts to control acquisition expenses of insurers, such as the amounts yielded under bancassurance agreements, have not been effective

• Distribution channels unique in Europe, strongly polarised to agencies, with the highest bancassurance rate but with amongst the lowest levels of brokers and direct

• Direct and online sales are in their infancy, but given that the model has been tried and tested abroad, it should engage the market at an accelerated rate when the channel is focused upon

• There are niches across the industry given its nascent status; low penetration, premium per capita, less take-up by women, underdeveloped branches such as ‘support’, distribution networks to access etc.

• Compulsory insurance is a growth area in third-party, earthquake protection and commercial liability • Penetration is the lowest in Europe and the government is seeking to increase holding thereof

• All in all, the Turkish market is highly attractive for its growth prospects, but the real question for insurers is how to make it a profitable one

• The answer lies, arguably, in gaining competitive advantage in underwriting, particularly in selection and competitive, effective pricing over the long-term

HISTORY

• Insurance in Turkey dates back to 1870’s. During the Ottoman Empire, insurance was mainly run by foreign, international agencies

• In 1900, 81 foreign insurance companies operating in Turkey came together under the umbrella of the first professional organisation “Insurers Syndicate of Turkey”

• After the proclamation of the Republic in Turkey in 1923, Turkiye Is Bankasi was established in 1924. Then in 1925, the commencement of Anadolu Sigorta A.S, the insurance group of Turkiye Is Bankasi, followed

• Liberalization of the regulations governing the insurance sector commenced in the 1980s, in parallel with legal reform of other financial sectors (Primarily the banking and securities) and gathered momentum in the early 2000s

• The late 2000s saw the regulatory framework develop at an acceleration rate, driven by aspirations to join the EU and promises to the IMF

• Today, there are 57 insurance and reinsurance companies in total in Turkey, most of which are privately owned and 33 (operating actively) which are non-life

• These companies have to be a member of the “The Association of the Insurance and Reinsurance Companies of Turkey,” the present incarnation of the 1900 organisation

• The General Directorate of Insurance the Prime Ministry Undersecretariat of the Treasury regulates the insurance system of the country

• Since 1988, companies have had to either operating in the life or non-life sector

• The penetration of foreign insurers, given few barriers to entry and a government encouraging inward FDI is high

• Competition is fierce, detrimentally impacting pricing ability and ergo profits

SEGREGATION OF LIFE AND NON LIFE (1 OF 2)

• Required to do one or the other (life vs. non life)• Since 1998, insurance companies have been obliged to act either in the life or non-life

insurance branches• Even though non-life insurance companies cannot issue new policy in life branch they are

allowed to keep their existing portfolio garnered prior to the regulation• As of the end of 2009 there were 4 non-life insurance companies which have life portfolio as well• These companies are Aksigorta AS, Generali Sigorta AS, Hür Sigorta AS and Merkez Sigorta AS. • Merkez Sigorta AS is currently inactive in all branches

• In the current system, life insurance companies can also operate in health and casualty branches as well

• However, if life insurance company also operate in the pension system, it can only work in casualty and not health

• Pension companies can not operate in health and other non-life branches except casualty branch

• The division between the life and non-life has necessitated the structuring of separate operating entities, largely distinguishable by the common use of suffix's

• Sigorta for general insurers• Hayat for life• Emeklilik for life and pension• An example of this is Aviva Sigorta and Aviva Emeklilik and similarly so for Allianz etc.

SEGREGATION OF LIFE AND NON LIFE (2 OF 2)• Non-life dominates the insurance market and continues to do so

• According to CES, on a premium basis, non-life share has actually increased from 82.1% in 1999 to 86.6% in 2008

• Indeed, in 2008 Turkey had the third highest proportion of non-life to life• It is similar in structure to other developing European countries such as Romania, Hungary,

Bulgaria, Latvia, Lithuania, Estonia and Iceland

Breakdown of European Insurance Premiums By Country (2008)

Source: Analysis of CEA Statistics N°40: European Insurance in Figures, Data 1999-2008

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Life Non-life Non-Life Average

COMPANIES• In 2009 there were 37 non-life insurers, 10 life insurers, 14 life / pension companies and 1

reinsurance company• Türkiye İş Bankası (İşbank) founded Milli Reasürans T.A.Ş. (“Milli Re”) to operate the formerly

compulsory reinsurance system in 1929 and under the present system covers cession for 30% of the market with foreign players accounting for the rest

• According to CES, Turkey has consistently had the 19th most number of insurers in Europe• 4 of 37 non-life insurance companies and 1 of 10 life insurance companies were not active in 2009

• As a result, 57 of 62 total companies actively operate in the market• Inactive companies are Inter Sigorta AS, Magdeburger Sigorta AS, Merkez Sigorta AS, Rumeli

Sigorta AS and Rumeli Hayat Sigorta AS• Due to the stated reasons of: “Authority of Selling New Contracts Has Been Cancelled” or “Stopped

Selling New Contract Voluntarily”• As will be discussed, the number of foreign companies in the market has markedly increased

2924 21 18 16 14 14

79

11 14 19 22 23

0

5

10

15

20

25

30

35

40

2003 2004 2005 2006 2007 2008 2009Domestic Foreign

Non-Life Companies Growth Since 2003 (Number)

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: TSRB state 2009 non-life companies as 36 - presumably characterisation of operating companies or timing of corporate actions

ENTRANTS AND CORPORATE ACTIVITY

Year Company Note

2009 Neova Sigorta A Licence

2009 Ziraat Sigorta AS Licence

2008 Dubai Group Sigorta AS Licence

2008 Ace European Group Ltd Branch

2008 Türk Nippon Sigorta AS Generate premiums again

2008 Zurich Sigorta As Acquires Teb

2008 Cardif Sigorta AS Licence

2008 SBN Sigorta AS Acquires Tikaret

2007 Mapfre Sigorta AS Acquires Genel Sigorta

2007 Eureko Sigorta AS Acquires Garanti Sigorta

2007 Atradius Sigorta AS Licence

2007 Coface Sigorta AS Licence

2006 Ergo (Munich Re) Acquires Avrupa Holding

2006 Liberty Sigorta As Acquires Seker Sigorta

2005 HDI Sigorta AS Acquires Ihlas

Year Activity

2009 Bati liquidated

2009 Güven Sigorta AS merged to Groupama Sigorta AS

2009 Basak Groupama became Goupama

2009 Ergoisvicre changed name to ERGO

2009 AIG rebranded to Chartis

2008 AXA Oyek amalgamated into AXA (Partner buyout)

2008 Koc Allianz became Allianz (Partner buyout)

2008 Turkiye Genel became Mapfre Genel

2008 Zurich acquired life business of TEB (Sigorta)

2008 SBN acquired Tikaret

2008 Harel acquired Turk Nipon

2008 Toprak became Euro. Likely linked to asset requisition by gov.

2007 Eureko acquires name Garanti through 80/20% ownership JV

2006 Basak became Basak Groupama in 2006

2006 Finans becomes part of Fiba in 2006

2006 ERGO acquires majority of shares of Turkish insurer Isvicre

2006 Liberty acquires Sekera in 2006

2005 HDI acquired Ihlas in 2005

Entrants

Corporate Activity

• As illustrated on the preceding page, there have been an increasing number of new players in recent years – from 7 in 2003 to 23 in 2009

• Naturally, there has been a degree of consolidation, seeing foreign players buy out local partners (With consequent name changes) and assets being merged

• In 2008, Allianz and AXA bought out the remaining shares of their partners Koc and Oyek

• A substantial force was created in Groupamain 2009 when both Başak Sigorta and Güven Sigorta were brought into the fold

OVERVIEW OF BRANCHES

Branches Number of Companies

Health(*) 36

Casualty(**) 54

Land Vehicles 29

Railway Vehicles 30

Air Vehicles 30

Sea Vehicles 30

Transport 30

Fire/Natural Disaster 30

General Damages 30

Land Vehicles Liability 29

Air Vehicles Liability 29

Sea Vehicles Liability 30

Public Liability 30

Credit 15

Fidelity Guarantee 30

Financial Loss 31

Legal Protection 23

Support 5

(*) 7 of are life companies

(**) 23 of are life or pension companies

• 18 branches

• Before the new Insurance Law no: 5684 came into effect in June 2007 (Replacing Insurance Supervision Law No. 7397) there were 10 non-life branches

• According to current regulations, non-life insurance companies can operate in some or all 18 non-life branches

• See slide “Segregation of life and non life”

• Life insurance companies could operate some or all 7 life branches

• Most companies act in all sectors

• Health and casualty numbers are high due to life companies

• Insurers generated premium in 17 of the 18 non-life branches

• There has not been premium production in the Support branch as of yet

Involvement per Non-Life Branch

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

CHANGE IN COMPANIES PER BRANCH

0 10 20 30 40 50 60

Credit

Legal Protection

Agriculture

Motor Vehicle TPL

Accident

Fire

Marine

Engineering

Health

Personal Accident

2009 2008 2007 2006 2005

2006 2007 2008 2009

0% 2% 9% 2%

0% -15% 14% -13%

0% -16% 15% -3%

0% -16% 15% -3%

0% -16% 15% -3%

0% -16% 15% -7%

0% 0% 4% 4%

7% 38% 5% -4%

0% 20% 0% 11%

133% 57% 18% -38%


• Indicating greater competition per branch, the aggregate number of companies per branch has increased from 261 to 272, with a nadir in 2007, having fallen 4%

• This increased 11% in 2008 and fell 4% again in 2009• Accident (Casualty) is competitive due to life and pension competition

• Smaller segments of agriculture and legal protection have grown since 2006

• Credit has experienced the greatest percentage in and outflow of companies

• 5 companies exited in 2009, although some of the more recent players are two of the world leaders

240

245

250

255

260

265

270

275

280

285

290

2005 2006 2007 2008 2009

Number

Growth Number (Aggregate)Companies per Branch

DETAILED OVERVIEW OF PRODUCT LINES

2008 2009 % Total

000 TL Gross Premium Direct Premium Gross Premium Direct Premium GP Growth 2008 2009

Non-Life Total 10,204,054 9,995,307 10,614,147 10,371,213 4% 87% 85%Health 1,305,015 1,266,962 1,390,174 1,320,202 7% 11% 11%Travel Health 21,118 21,106 25,009 24,994 18% 0% 0%Casualty 505,364 502,671 540,754 535,867 7% 4% 4%Land Vehicles 2,850,269 2,838,698 2,662,573 2,652,218 -7% 24% 21%Railway Vehicles 0 0 153 153 0% 0%Air Vehicles 31,019 30,968 57,327 57,166 85% 0% 0%Sea Vehicles 100,415 99,183 112,590 110,438 12% 1% 1%Transport 312,920 305,195 261,394 254,395 -16% 3% 2%Fire and Natural Disaster 1,827,796 1,784,112 1,925,466 1,877,438 5% 16% 15%General Damages (Engineering) 806,960 774,531 934,662 900,813 16% 7% 8%Land Veh. Liab. (Compulsory) 1,723,053 1,715,151 1,938,566 1,927,234 13% 15% 16%Land Vehicles Liability (Other) 339,233 291,457 319,654 277,580 -6% 3% 3%Air Vehicles Liability 31,610 31,302 47,104 46,187 49% 0% 0%Sea Vehicles Liability 266 266 375 302 41% 0% 0%Public Liability 233,386 226,190 251,946 246,103 8% 2% 2%Credit 40,946 34,558 27,712 26,625 -32% 0% 0%Fidelity Guarantee 464 464 16,642 14,225 3487% 0% 0%Financial Loss 41,808 40,080 65,353 62,580 56% 0% 1%Legal Protection 32,413 32,413 36,693 36,693 13% 0% 0%Life Total 1,575,828 1,564,374 1,822,030 1,821,764 16% 13% 15%Total 11,779,882 11,559,681 12,436,177 12,192,977

Premium Production per Branches

• The share of life business in total volume has been increasing as the growth rate in non-life business slowed down

• Life insurance accounted for nearly 15% of total premiums in 2009 compared to 85% for non-life insurance

• The following table shows the composition of direct and gross premium per branch for the last two years and gross premiums %


DETAILED OVERVIEW OF PRODUCT LINES

Branch DetailsBranch Name No.of Company

Generating PremiumNo.of Written

PoliciesDirect Premium

(000 TL)Share in Total

Direct Premium %Health 36 1,090,739 1,345,181 13.15Casualty 50 5,920,558 530,241 5.18Land Vehicles 28 3,704,523 2,613,227 25.54Railway Vehicles 2 6 153 0.00Air Vehicles 17 269 57,166 0.56Sea Vehicles 27 12,418 110,379 1.08Transport 29 1,200,135 251,432 2.46Fire and Natural Disaster 29 3,036,715 1,545,231 15.10General Damages 29 2,045,868 771,720 7.54Land Veh, Liab, (Compulsory) 28 10,767,687 1,887,097 18.44Land Vehicles Liab, (Other) 28 864,205 228,173 2.23Air Vehicles Liability 16 273 46,187 0.45Sea Vehicles Liability 3 85 302 0.00Public Liability 29 281,481 245,322 2,40Credit 10 21,334 26,625 0.26Fidelity Guarantee 12 61,047 14,225 0.14Financial Loss 19 50,881 62,580 0.61Legal Protection 20 506,433 36,693 0.36

Support 0 0 0 0.00

Subtotal 1 29,564,657 9,771,935 95.51Compulsory Earthquake 28 3,451,613 317,893 3.11Subsidized Agriculture 22 213,051 98,777 0.97

Green Card 10 52,135 43,201 0.42

Subtotal 2 3,716,799 459,871 4.49General Total 33,281,456 10,231,806 100.00

• Largest five branches account for ~80% of premiums and policies but the premiums per contract are relatively small. Commercial vehicle insurance contracts are generally large


OVERVIEW OF COMPETITION BY PRODUCT LINE

• Competition in branches can be split into core areas and periphery, smaller branches according to total GWP

• Core areas are fire/disaster, general (Liability less so), health and land vehicles cumulatively accounting for 88.6% of the total market

• Greatest concentration here, with larger companies dominating• Smaller companies occasionally are more focused in specialty areas and have gained large

holdings• Car insurance is the largest sector in terms of premiums, with health and casualty being

the next, albeit smaller, largest contributors

• Each of health, land vehicles, land vehicles liability and fire and natural disasters branches generated more than 10% of total premium production in 2009

• Parallel to their share in premium production, health, land vehicles, land vehicles liability and fire and natural disasters branches have each share of over 10% in total claim payments in 2009

• Auto insurance constituted approximately 60% of total claim payments of non-life branches in 2009

• Land vehicles, land vehicles liability, health/sickness and fire and natural disasters branches account for approximately 78% of total premium and 69% of total policies issued in non-life branches

STRENGTH OF BUSINESS PER PRODUCT LINE (1 OF 2)

% Accident Air Vehicles

Air Vehicles

Liab.Credit Financial

Loss

Fire and Natural

Disasters

General Damages

General Liab. Health Land

Vehicles

Land Vehicles

Liab.

Legal Protectio

nOther Sea

Vehicles Transport

AXA

Anadolu

Allianz

Groupama

Yapi Kredi

Ergo

Aksigorta

Gunes

Mapfre Genel

Eureko

FIBA

Aviva

Ray

Group 1 – Total GWP per Branch % (Read across)

• The table below illustrates the contribution of GWP per branch for Group 1

• Land vehicles, general and fire and natural disaster are the largest contributors, on average accounting for approximately 79% across the branches

• Allianz, Yapi Kredi and to some extent Analdolu and Aksigorta have large exposure to health

• Eureko has the most differentiated exposure, with the highest exposure to accident (2nd across all companies) and general liability. Exposure to land vehicle liability is the lowest of group 1 and 3rd

lowest across all companies. This is notable as Eureko has consistently made the highest aggregated underwriting result


2.34 0.08 0.00 na 0.00 23.24 7.28 2.71 0.78 33.96 26.44 0.46 0.00 0.61 2.10

3.58 0.48 0.46 0.01 0.40 18.28 8.00 2.81 12.31 27.18 21.00 0.39 na 2.90 2.19

6.65 0.12 0.17 0.89 1.39 18.94 6.27 2.43 28.24 18.37 11.22 0.42 na 2.00 2.88

1.87 0.00 0.43 na 0.08 19.97 10.55 0.82 11.76 30.52 20.56 0.42 na 1.21 1.81

2.17 0.22 0.07 0.01 na 14.94 7.14 1.64 46.81 16.40 8.05 0.13 na 0.84 1.59

4.32 0.01 0.43 na 0.22 14.76 3.87 1.67 5.75 30.03 34.35 0.33 0.06 0.26 3.93

2.27 0.50 0.32 na 0.97 17.35 10.14 1.70 13.77 30.97 18.87 0.53 0.19 0.35 2.06

1.62 2.22 3.11 0.01 0.31 18.08 11.91 1.56 7.98 25.70 23.16 0.50 0.24 1.90 1.71

2.71 0.19 0.07 na 0.56 18.88 11.56 2.63 8.85 28.76 21.67 na na na 4.12

12.84 3.57 0.04 0.17 0.76 23.26 18.11 4.57 5.12 19.54 7.48 0.12 na 1.22 3.20

3.00 0.27 na 1.09 0.29 18.37 14.62 0.80 1.91 27.02 28.54 0.71 0.13 0.94 2.29

3.99 na na na 1.04 25.66 10.81 1.82 na 17.74 35.02 0.46 na 0.34 3.12

2.32 2.42 2.90 na 0.19 19.76 12.09 3.35 0.53 28.37 22.34 0.40 0.13 1.66 3.54

Core areaPeriphery Periphery

STRENGTH OF BUSINESS PER PRODUCT LINE (2 OF 2)


Air Vehicles


Loss

Fire and Natural

Disasters

General Damages


Vehicles

Land Vehicles

Liab.

Legal Protectio

nOther Sea

Vehicles Transport

Ankara

Zurich

Chartis

HDI

Birlik

Isik

Liberty

Hur

Generali

Dubai Group

SBN

Coface

Group 2 – Total GWP per Branch % (Read across)


4.51 na na na na 14.11 10.11 0.84 1.28 31.06 35.97 0.30 na 0.52 1.31

10.47 0.11 -0.02 -0.40 2.60 28.22 18.29 6.10 4.92 19.95 3.83 0.40 0.01 0.18 5.36

32.02 na 0.18 na 7.92 14.36 2.55 17.49 3.43 3.11 1.13 na 6.56 0.00 11.25

2.21 na na na na 10.20 2.53 2.52 0.35 33.93 46.62 0.31 na 0.04 1.30

5.04 na na na na 39.98 13.01 0.76 1.40 23.03 15.73 na 0.00 0.02 1.01

6.70 0.11 0.19 na 0.01 23.98 7.06 2.11 0.80 19.75 36.74 0.07 0.94 0.06 1.49

2.93 na na na 0.00 8.85 4.14 0.72 0.17 55.55 27.02 na na 0.06 0.57

0.63 na na na 0.03 6.81 1.37 0.13 0.07 5.75 84.99 na 0.01 0.00 0.20

1.93 0.09 0.28 na 0.08 28.81 6.18 2.03 0.51 35.31 19.09 0.64 0.09 0.61 4.35

2.49 na na na 0.01 8.99 1.71 0.67 0.66 43.01 40.51 0.76 0.05 0.35 0.78

12.13 0.09 na na na 8.30 3.64 0.84 4.28 16.64 53.80 na na 0.03 0.25

na na na 100.00 na na na na na na na na na na na

• The table below illustrates the contribution of GWP per branch for Group 2

• Similar to group 1, group 2 has high exposure to land vehicle branches, however as can be seen with the heat map, exposure is much more disparate

• Group 2 has 60% of the exposure in general damage and 14% of health (presumably there are advantages of scale here)

• Accident contribution to total GWP is much higher• Group 2 have more specialist providers

• Chartis has atypical exposure to accident, general liability and transport and incidentally made the 4th most underwriting results when aggregated over 5 years

• Coface, a subsidiary of BNP, focuses exclusively on credit and is a new entrant

SHARE OF TOTAL MARKET PER PRODUCT LINE (1 OF 2)


Air Vehicles


Loss

Fire and Natural

Disasters

General Damages


Vehicles

Land Vehicles

Liab.

Legal Protectio

nOther Sea

Vehicles Transport

AXA

Anadolu

Allianz

Groupama

Yapi Kredi

Ergo

Aksigorta

Gunes

Mapfre Genel

Eureko

FIBA

Aviva

Ray

Group 1 – Market Share per Company per Branch (% of Total Market)

• The table below illustrates market share for each branch, per company as a % of total GWP

• Group 1 accounts for approximately 86% of market share (note: total G1&2 equals 99.13% as remainder excluded)

• The core area or fire/disaster, general, health and land vehicles cumulatively account for 77.4% of the total market (88.6% including group 2)

• Land vehicles dominates with 40.5% (47.4% total)• The heat map demonstrates how market share, particularly in the core area, trails off by

size


0.30 0.01 0.00 na 0.00 2.95 0.92 0.34 0.10 4.31 3.35 0.06 0.00 0.08 0.27

0.44 0.06 0.06 0.00 0.05 2.26 0.99 0.35 1.52 3.36 2.59 0.05 na 0.36 0.27

0.61 0.01 0.02 0.08 0.13 1.75 0.58 0.23 2.61 1.70 1.04 0.04 na 0.18 0.27

0.11 0.00 0.03 na 0.00 1.17 0.62 0.05 0.69 1.79 1.21 0.02 na 0.07 0.11

0.13 0.01 0.00 0.00 na 0.90 0.43 0.10 2.83 0.99 0.49 0.01 na 0.05 0.10

0.29 0.00 0.03 na 0.01 0.99 0.26 0.11 0.39 2.02 2.31 0.02 0.00 0.02 0.26

0.19 0.04 0.03 na 0.08 1.47 0.86 0.14 1.16 2.62 1.60 0.04 0.02 0.03 0.17

0.12 0.16 0.22 0.00 0.02 1.31 0.86 0.11 0.58 1.86 1.67 0.04 0.02 0.14 0.12

0.10 0.01 0.00 na 0.02 0.67 0.41 0.09 0.32 1.03 0.77 na na na 0.15

0.69 0.19 0.00 0.01 0.04 1.25 0.97 0.24 0.27 1.05 0.40 0.01 na 0.07 0.17

0.09 0.01 na 0.03 0.01 0.56 0.44 0.02 0.06 0.82 0.87 0.02 0.00 0.03 0.07

0.11 na na na 0.03 0.70 0.30 0.05 na 0.48 0.96 0.01 na 0.01 0.09

0.06 0.06 0.07 na 0.00 0.50 0.30 0.08 0.01 0.72 0.56 0.01 0.00 0.04 0.09

SHARE OF TOTAL MARKET PER PRODUCT LINE (2 OF 2)


Air Vehicles


Loss

Fire and Natural

Disasters

General Damages


Vehicles

Land Vehicles

Liab.

Legal Protectio

nOther Sea

Vehicles Transport

Ankara

Zurich

Chartis

HDI

Birlik

Isik

Liberty

Hur

Generali

Dubai Group

SBN

Coface

Group 2 – Market Share per Company per Branch (% of Total Market)


• Group 2 exposure is similar to group 1 with the exception of health

• Larger market shares are held in accident and transport

• No company here has a branch with more than 1% of total market share

• Group 2 accounts for approximately 13% of the total market on a total GWP basis

0.09 na na na na 0.27 0.20 0.02 0.02 0.61 0.70 0.01 na 0.01 0.03

0.22 0.00 0.00 -0.01 0.06 0.61 0.39 0.13 0.11 0.43 0.08 0.01 0.00 0.00 0.11

0.55 na 0.00 na 0.14 0.25 0.04 0.30 0.06 0.05 0.02 na 0.11 0.00 0.19

0.04 na na na na 0.18 0.04 0.04 0.01 0.59 0.81 0.01 na 0.00 0.02

0.06 na na na na 0.45 0.15 0.01 0.02 0.26 0.18 na 0.00 0.00 0.01

0.07 0.00 0.00 na 0.00 0.27 0.08 0.02 0.01 0.22 0.41 0.00 0.01 0.00 0.02

0.01 na na na 0.00 0.04 0.02 0.00 0.00 0.26 0.12 na na 0.00 0.00

0.00 na na na 0.00 0.04 0.01 0.00 0.00 0.03 0.45 na 0.00 0.00 0.00

0.02 0.00 0.00 na 0.00 0.24 0.05 0.02 0.00 0.30 0.16 0.01 0.00 0.01 0.04

0.02 na na na 0.00 0.07 0.01 0.01 0.00 0.32 0.31 0.01 0.00 0.00 0.01

0.10 0.00 na na na 0.07 0.03 0.01 0.04 0.14 0.45 na na 0.00 0.00


RELATIVE MARKET SHARE BY BRANCH (1 OF 2)


Air Vehicles


Loss

Fire and Natural

Disasters

General Damages


Vehicles

Land Vehicles

Liab.

Legal Protectio

nOther Sea

Vehicles Transport

AXA

Anadolu

Allianz

Groupama

Yapi Kredi

Ergo

Aksigorta

Gunes

Mapfre Genel

Eureko

FIBA

Aviva

Ray

Group 1 – Relative Market Share by Branch (Read Down)

• The largest companies generally hold 10% stakes across the board, with a few exceptions in more specialist lines

• The Core branches show relative dominance by the larger players with other companies lighting up the heat map around the periphery

• Certain lines have extremely high concentration- average top-5 concentration is 70%

• In health, the top 5 constitute 83% of the market• Air vehicle, credit and other are over 90%• Top 10 average concentration is 91%


6.57 1.72 0.10 na 0.00 15.53 10.28 13.78 0.92 16.53 15.27 16.07 0.00 6.96 10.39

9.78 10.50 12.10 0.41 7.57 11.89 11.00 13.93 14.08 12.88 11.81 13.34 na 32.04 10.52

13.61 1.97 3.31 30.03 19.80 9.23 6.46 9.02 24.17 6.52 4.72 10.55 na 16.54 10.39

2.42 -0.01 5.40 na 0.70 6.17 6.89 1.92 6.38 6.87 5.49 6.84 na 6.33 4.14

2.89 2.30 0.86 0.12 na 4.75 4.80 3.97 26.17 3.80 2.21 2.21 na 4.53 3.75

6.42 0.12 6.23 na 2.28 5.22 2.89 4.50 3.57 7.73 10.49 6.09 2.46 1.55 10.29

4.24 7.48 5.84 na 12.64 7.72 9.54 5.76 10.77 10.04 7.26 12.19 9.42 2.65 6.77

2.59 28.10 48.07 0.30 3.43 6.88 9.57 4.52 5.33 7.12 7.61 10.00 10.22 12.25 4.80

2.14 1.17 0.52 na 3.07 3.55 4.59 3.76 2.92 3.93 3.52 na na na 5.72

15.21 33.57 0.43 3.39 6.24 6.56 10.80 9.81 2.54 4.02 1.82 1.75 na 5.86 6.68

2.01 1.46 na 12.03 1.35 2.94 4.94 0.97 0.54 3.15 3.95 5.94 2.40 2.55 2.71

2.41 na na na 4.36 3.69 3.29 2.00 na 1.86 4.35 3.44 na 0.83 3.31

1.29 10.72 15.62 na 0.76 2.62 3.39 3.39 0.12 2.75 2.56 2.78 1.96 3.73 3.47

RELATIVE MARKET SHARE BY BRANCH (2 OF 2)


Air Vehicles


Loss

Fire and Natural

Disasters

General Damages


Vehicles

Land Vehicles

Liab.

Legal Protectio

nOther Sea

Vehicles Transport

Ankara

Zurich

Chartis

HDI

Birlik

Isik

Liberty

Hur

Generali

Dubai Group

SBN

Coface

Group 2 – Relative Market Share by Branch (Read Down)


• The smaller lines have less levels of concentration, permitting larger market shares

• Across air vehicles, Gunes has considerable stakes, dominating the liability side• Coface as a monoline is also the dominant player in credit, with under half of market share.

Allianz is the second largest player with Fiba having a smaller stake

• In accident, Chartis, Allianz and Eureko lead

• The smaller players of the market muddle around the core of the market with sporadic shares in the periphery

1.94 na na na na 1.45 2.19 0.65 0.23 2.32 3.19 1.59 na 0.91 0.99

4.97 0.41 -0.10 -3.15 8.59 3.19 4.37 5.25 0.98 1.64 0.37 2.33 0.08 0.35 4.48

12.28 na 0.66 na 21.14 1.31 0.49 12.15 0.55 0.21 0.09 na 66.62 0.00 7.59

0.85 na na na na 0.94 0.49 1.76 0.06 2.27 3.69 1.49 na 0.06 0.88

1.26 na na na na 2.37 1.63 0.34 0.15 0.99 0.81 na 0.03 0.02 0.44

1.65 0.21 0.46 na 0.02 1.41 0.88 0.94 0.08 0.85 1.87 0.22 6.14 0.06 0.65

0.30 na na na 0.00 0.21 0.21 0.13 0.01 0.98 0.56 na na 0.02 0.10

0.07 na na na 0.03 0.19 0.08 0.03 0.00 0.12 2.03 na 0.03 0.00 0.04

0.36 0.13 0.51 na 0.11 1.28 0.58 0.69 0.04 1.14 0.73 1.47 0.42 0.46 1.43

0.41 na na na 0.01 0.36 0.14 0.20 0.05 1.24 1.39 1.57 0.21 0.24 0.23

2.27 0.13 na na na 0.37 0.34 0.28 0.33 0.54 2.07 na na 0.02 0.08


DISTRIBUTION - CHANNEL DETAIL• Distribution is discussed in detail later in the presentation• Land vehicle & liability (and most of other vehicle) and legal protection are almost exclusively distributed

through agents constituting 77% of the premiums agents sell• In direct, 68% of air vehicle is sold, with approximately half of rail/sea/air and 35% of credit

• These are invariably substantial contracts- air contracts average at TKL 191k• Brokers are particularly strong in financial loss, credit and public liability• Banks sell the half of casualty agents don’t, lead fidelity guarantee with moderate shares in fire/general

damage• Agents, according to Nielsen, will retain their potency, with 43% of surveyed anticipating to purchase from

there in the future. 23% will from banks and only 10% directly. 24% are undecided (Notably, 88% of surveyed are unsure when they will buy insurance next too)

0% 20% 40% 60% 80% 100%

CasualtyHealth

Land VehiclesRailway Vehicles

Air VehiclesSea Vehicles

TransportFire

General DamagesLand Vehicles Liab.Air Vehicles Liability

Sea Vehicles LiabilityPublic Liability

CreditFidelity Guarantee

Financial LossLegal Protection

Direct

Agencies

Banks

Brokers

Other

0 1,000,000 2,000,000 3,000,000

CasualtyHealth

Land VehiclesRailway Vehicles

Air VehiclesSea Vehicles

TransportFire

General DamagesLand Vehicles Liab.Air Vehicles Liability

Sea Vehicles LiabilityPublic Liability

CreditFidelity Guarantee

Financial LossLegal Protection

Direct

Agencies

Banks

Brokers

Other

Distribution Contribution by Branch Premium Dist. Volume by Branch

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data and Sigorta Tutum ve Davranış Araştırması, Nielsen 2008. Translated by author from Turkish

DISTRIBUTION – BANCASSURANCE – GROUP 1• Bancassurance is the highest in Europe• AXA is the leader in bancassurance with 5 large agreements (10 in total)• Aksigorta benefits from relationship with AK Bank, as does Anadolu with TIB• HSBC have a great number of agreements


Axa Anado

lu

Allian

z

Group

ama

Yapi K

redi

Ergo

Aksig

orta

Gunes

Mapfre

Gen

elEur

eko

Fiba

Aviva

Ray Total

Akbank Tas 0 0 0 0 0 0 866 0 0 0 0 0 0 866Aktif Yatirim Bankasi 1 1 5 0 0 0 0 1 0 0 0 0 0 8Albaraka Turk Katilim Bankasi 0 1 100 0 0 0 0 102 0 0 0 100 0 303Alternatifbank 0 47 0 0 0 0 0 0 0 0 0 0 46 93Anadolu Bank 63 0 0 86 0 0 0 88 0 0 0 85 0 322Arap Turk Bankasi 0 6 0 0 0 0 0 0 0 0 0 0 0 6Asya Katilim Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0Bank Pozitif Kredi Ve Kalkinma Bankasi 5 0 0 0 0 0 0 0 0 0 0 25 0 30Birlesik Fon Bankasi 0 0 0 1 0 0 0 0 0 0 0 0 0 1Citibank 0 1 0 0 0 0 0 0 0 0 0 0 0 1Deniz Finansal Kiralama 0 0 0 0 0 0 0 0 0 0 0 1 0 1Denizbank 424 0 0 411 0 0 0 0 0 143 0 290 0 1,268Eurobank Tekfen 0 0 0 0 0 0 0 0 0 38 0 0 0 38Finansbank 458 0 0 0 0 0 0 0 0 0 436 0 0 894Fortis Bank 293 0 0 0 0 0 0 0 0 0 1 0 276 570Hsbc Bank 337 0 332 0 0 413 0 0 331 0 0 334 0 1,747Iller Bankasi Ao 0 0 0 2 0 0 0 0 0 0 0 0 0 2Ing Bank 324 0 354 0 0 0 0 0 0 0 1 0 0 679Millennium Bank 19 0 0 0 0 0 0 0 0 0 0 0 0 19Sekerbank Tas 0 0 0 0 0 0 0 0 0 0 0 0 0 0T. Garanti Bankasi 0 0 0 0 0 0 0 0 0 661 0 0 0 661T. Sinai Kalkinma Bankasi 0 1 0 0 0 0 0 0 0 0 0 0 0 1T. Vakiflar Bankasi Ao 0 0 0 0 0 0 0 442 0 0 0 0 0 442T.C. Ziraat Bankasi 0 0 0 1,195 0 0 0 0 0 0 0 0 0 1,195Tasfiye Halindeki Emlakbank 0 0 0 1 0 0 0 0 0 0 0 0 0 1Tekstil Bankasi 0 0 0 0 0 0 0 51 0 0 0 44 0 95Turk Ekonomi Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0Turkiye Finans Katilim Bankasi 0 0 0 0 0 0 0 0 0 180 0 0 0 180Turkiye Halk Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0Turkiye Is Bankasi 0 1,089 0 0 0 0 0 0 0 0 0 0 0 1,089Turklandbank 25 0 0 0 0 0 0 27 0 0 0 0 0 52Yapi Ve Kredi Bankasi 0 0 0 0 838 0 0 0 0 0 0 0 0 838Yatirim Finansal Kiralama 0 0 0 0 0 0 0 0 0 0 0 1 0 1

DISTRIBUTION – BANCASSURANCE – GROUP 2• Group 2 do not benefit from bancassurance as the larger companies do, with only

domestic companies having meaningful relationships


Ankar

a

Zuric

h

Charti

s

Hdi Birlik

Isik

Libe

rty

Hur Gener

ali

Dubai

Gro

upSbn Cof

ace

Remai

nder

Total

Akbank Tas 0 0 0 0 0 0 0 0 0 0 0 0 0 0Aktif Yatirim Bankasi 0 0 3 0 0 0 0 0 0 0 0 0 0 3Albaraka Turk Katilim Bankasi 0 0 0 0 0 100 0 0 0 0 0 0 0 100Alternatifbank 0 0 0 0 0 0 0 0 0 0 0 0 0 0Anadolu Bank 0 0 0 0 0 0 0 0 0 0 0 0 0 0Arap Turk Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0Asya Katilim Bankasi 0 0 0 0 0 159 0 0 0 0 0 0 0 159Bank Pozitif Kredi Ve Kalkinma Bankasi 0 0 10 0 0 0 0 0 0 0 0 0 0 10Birlesik Fon Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 1 1Citibank 0 0 38 0 0 0 0 0 0 0 0 0 0 38Deniz Finansal Kiralama 0 0 0 0 0 0 0 0 0 0 0 0 0 0Denizbank 0 0 0 0 0 0 0 0 0 0 0 0 0 0Eurobank Tekfen 0 0 0 0 0 0 0 0 42 0 0 0 0 42Finansbank 0 0 0 0 0 0 0 0 0 0 0 0 0 0Fortis Bank 0 0 0 0 0 0 0 0 0 0 0 0 297 297Hsbc Bank 0 0 335 0 0 0 0 0 0 0 0 1 0 336Iller Bankasi Ao 0 0 0 0 0 0 0 0 0 0 0 0 0 0Ing Bank 0 0 0 0 0 0 0 0 0 0 0 0 0 0Millennium Bank 0 0 0 0 0 0 0 0 0 0 0 0 0 0Sekerbank Tas 0 0 0 0 0 0 249 0 0 0 250 0 0 499T. Garanti Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0T. Sinai Kalkinma Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0T. Vakiflar Bankasi Ao 0 0 0 0 0 0 0 0 0 0 0 0 0 0T.C. Ziraat Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0Tasfiye Halindeki Emlakbank 0 0 0 0 0 0 0 0 0 0 0 0 0 0Tekstil Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0Turk Ekonomi Bankasi 0 0 0 0 0 0 0 0 0 0 0 1 0 1Turkiye Finans Katilim Bankasi 0 0 0 0 0 180 0 0 0 0 0 0 0 180Turkiye Halk Bankasi 0 0 0 0 628 0 0 0 0 0 0 0 0 628Turkiye Is Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0Turklandbank 0 0 0 0 0 0 0 0 0 0 0 0 0 0Yapi Ve Kredi Bankasi 0 0 0 0 0 0 0 0 0 0 0 1 0 1Yatirim Finansal Kiralama 0 0 0 0 0 0 0 0 0 0 0 0 0 0

DISTRIBUTION – AGENTS – AGGREGATED BY YEAR

0

200

400

600

800

1,000

1,200

1,400

1,600

0

5,000

10,000

15,000

20,000

25,000

2005 2006 2007 2008 2009

Ray

Aviva

FIBA

Eureko

Mapfre Genel

Gunes

Aksigorta

Ergo

Yapi Kredi

Groupama

Allianz

Anadolu

AXA

Average

0

200

400

600

800

1,000

1,200

1,400

1,600

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2005 2006 2007 2008 2009

Remainder

Coface

SBN

Dubai Group

Generali

Hur

Liberty

Isik

Birlik

HDI

Chartis

Zurich

Ankara

Average

Group 1 - Aggregated by Year Group 2 - Aggregated by Year

• Agents are integral for general insurance sales in Turkey and have grown at a 9% CAGR

• Groupama has benefitted substantially from its tie up with both Başak Sigorta and Güven Sigorta who have substantial agent networks


DISTRIBUTION – AGENTS 4 YEAR CAGR

• Growth for Group 2 has been on average similar to Group 1; a stark difference to a comparison of brokers

• Eureko’s growth has arisen from a low base

• Groupama’s outperformance has occurred through corporate action

Group 1 – CAGR (2005-09) Group 2 - CAGR (2005-09)

-5%

0%

5%

10%

15%

20%

25%

30%

35%

CAGR Average

-5%

0%

5%

10%

15%

20%

25%

30%

35%

CAGR Average

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data.Note: CAGR unavailable for Dubai Group and Coface as new entrants. Coface added as 0% to allow SBN to show up graphically

DISTRIBUTION – AGENTS - DISTRIBUTION BY COMPANY(1 OF 2)

• It is interesting to note that some of the largest players such as AXA have grown Agents slower than the average

• Average CAGR for Group 1 is approximately 12%• The effect of the Groupama tie-up illustrates its dominance in agency in the chart below

• Group 1 CAGR is almost identical to that of the entire market (Few bps higher)

0%

5%

10%

15%

20%

25%

30%

35%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2005 2006 2007 2008 2009 CAGR Ave CAGR Total CAGR


Group 1 – Agent Distribution by Company

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

-100

0

100

200

300

400

500

600

700

800

900


DISTRIBUTION – AGENTS - DISTRIBUTION BY COMPANY(2 OF 2)• Average CAGR for Group 2 is approximately 11% against market of 12%

• The largest companies by agents are:• Groupama (26.16%), AXA (7.16%), Gunes (6.82%), Ergo (6.31%), Anadolu (6.06%),

Aksigorta (5.91%), Allianz (5.35%) and HDI (3.45%)

Group 2 - Agent Distribution by Company

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: Gaps in CAGR as no data available

DISTRIBUTION – BROKERS - AGGREGATED BY YEAR• The average share of brokers per group is 8%, though 66% of brokers are held by the top

12 companies (Group 1)

• The largest companies by brokers are:• Anadolu (6.96%), Gunes (6.84%), Ergo (6.50%), Chartis (6.38%), Allianz (6.15%), Mapfre

Genel (5.45%), Groupama (5.34%), Aviva (5.22%)

0

10

20

30

40

50

60

0

100

200

300

400

500

600

2005 2006 2007 2008 2009

Ray

Aviva

FIBA

Eureko

Mapfre Genel

Gunes

Aksigorta

Ergo

Yapi Kredi

Groupama

Allianz

Anadolu

AXA

Average

0

10

20

30

40

50

60

0

100

200

300

400

500

600

2005 2006 2007 2008 2009

Remainder

Coface

SBN

Dubai Group

Generali

Hur

Liberty

Isik

Birlik

HDI

Chartis

Zurich

Ankara

Average

Group 1 – Aggregated by Year Group 2 - Aggregated by Year


DISTRIBUTION – BROKERS - 4 YEAR CAGR

• Growth for Group 2 has been on average been far greater than Group 1 largely due to a lower base for growth than the larger players

• In particular Chartis, HDI and Birlik

Group 1 – CAGR (2005-09) Group 2 - CAGR (2005-09)

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

CAGR Average

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

CAGR Average

Note: CAGR shortened for SBN, Coface, Hur & Remainder as no data availableSource: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

-10%

-5%

0%

5%

10%

15%

20%

0

10

20

30

40

50

60


DISTRIBUTION – BROKERS - NUMBER (1 OF 2)

• It is interesting to note that some of the largest players such as AXA have grown brokers slower than the average

• Average CAGR for Group 1 is approximately 5%• Anadolu has grown well since 2006, as have Ergo and Mapfre Genel

• Broker growth leapt in 2006, but growth has since stalled• Yapi Kredi fell greatly in 2006

Group 1 – Number of Brokers Over 5 years


DISTRIBUTION – BROKERS - NUMBER (2 OF 2)

• Average CAGR for Group 2 is approximately 25% (Ex-remainder)

• Chartis has seen the largest nominal growth of Group 2, though the pace has been average

• HDI and Birlik have grown the fastest on CAGR, as have SBN and CoFace

• Generali, whilst one of the smaller insurers, has a notably large number of brokers

-20%

0%

20%

40%

60%

80%

100%

120%

-20

0

20

40

60

80

100

120


Group 2 - Number of Brokers Over 5 years

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data Note: Gaps in CAGR as no data available

STAFFING STRATEGY - BRAND BUILDING

Group 1 – Marketing Staff Group 2 - Marketing StaffMale Female Total % of

Total

Ankara 0 0 0 0.0%

Zurich 15 56 71 6.8%

Chartis 10 12 22 2.1%

HDI 0 0 0 0.0%

Birlik 2 10 12 1.1%

Isik 25 1 26 2.5%

Liberty 0 0 0 0.0%

Hur 10 4 14 1.3%

Generali 0 0 0 0.0%

Dubai Group 0 0 0 0.0%

SBN 0 0 0 0.0%

Coface 1 3 4 0.4%

Remainder 4 0 4 0.4%

Total 455 593 1,048 100.0%

Male Female Total % of Total

AXA 0 0 0 0.0%

Anadolu 37 62 99 9.4%

Allianz 0 0 0 0.0%

Groupama 0 0 0 0.0%

Yapi Kredi 122 210 332 31.7%

Ergo 0 0 0 0.0%

Aksigorta 0 0 0 0.0%

Gunes 31 36 67 6.4%

Mapfre Genel 28 22 50 4.8%

Eureko 80 118 198 18.9%

FIBA 37 10 47 4.5%

Aviva 25 19 44 4.2%

Ray 28 30 58 5.5%

Total 455 593 1,048 100.0%


• General insurers employ over a thousand marketing personnel

• Many of the large companies do not have any directly employed marketing staff

• E.g. Axa, Allianz and Groupama• Over half are employed by domestic companies

• Yapi Kredi has the largest marketing force followed by Eureko – together accounting for over half the total

STAFFING STRATEGY - TOTAL• General insurers employ approximately 7,600 personnel directly

• The large companies largely employ proportionately to their size

• According to CES, Turkey employs the 14th most people staff in insurance (Thought their estimate is 16,007, more than double of SGM estimates) and that rate from 1999 to 2008 has been a CAGR of 5%; the 4th highest

Group 1 – Total Staff Group 2 – Total StaffMale Female Total % of

Total

Ankara 109 109 218 2.8%

Zurich 91 105 196 2.6%

Chartis 66 96 162 2.1%

HDI 116 80 196 2.6%

Birlik 83 63 146 1.9%

Isik 103 51 154 2.0%

Liberty 97 88 185 2.4%

Hur 69 57 126 1.6%

Generali 53 64 117 1.5%

Dubai Group 62 39 101 1.3%

SBN 34 20 54 0.7%

Coface 15 8 23 0.3%

Remainder 134 108 242 3.2%

Total 3,724 3,929 7,653 100.0%

Male Female Total % of Total

AXA 280 290 570 7.4%

Anadolu 378 342 720 9.4%

Allianz 272 338 610 8.0%

Groupama 254 220 474 6.2%

Yapi Kredi 243 298 541 7.1%

Ergo 182 309 491 6.4%

Aksigorta 295 288 583 7.6%

Gunes 233 294 527 6.9%

Mapfre Genel 118 126 244 3.2%

Eureko 137 191 328 4.3%

FIBA 121 141 262 3.4%

Aviva 80 104 184 2.4%

Ray 99 100 199 2.6%

Total 3,724 3,929 7,653 100.0%


TRENDS (1 OF 2)

Trend ThoughtsDynamic Of Development

• Turkey has experienced huge interest from foreign financial institutions for its macroeconomic growth potential (7% CAGR over preceding decade)

• Trust in the insurance sector is strong, sustaining growth throughout the financial crisis

Stable But Key Macro/Industry Factors Undermine

• Overcapitalisation of insurers and high, if irregular, growth in GWP with fluctuating and marginal profit

• Premium volume falling in real terms• Relatively high propensity to save, but scepticism of doing so through

third parties and low penetration

“Size Of The Prize” • Most CEE countries are comparatively small on a global scale, though Turkey is the 13th largest market in Europe (CES direct premium basis), thus directing corporate development strategy to succeeding here

Development Stage • Turkey is comparatively underdeveloped to Western Europe and marketing and product manufacturing are geared to this

• Lowest European penetration rate (1.3% premium to DP vs. 7.58% in Europe) and the robust growth in insurance and pension sectors in recent years increased foreign investors’ attention to Turkish insurance market

• Premiums per capita are lowest in Europe• Related insurance employees offered training through organisations

• Turkey has a nascent insurance industry that requires a bespoke approach

• Given level of competition, profit vs. market share strategy must be carefully chosen over the short and long term

TRENDS (2 OF 2)

Trend ThoughtsRegulation • Rapidly evolving regulatory framework around financial services and

insurance - weighted in favour of policyholders

Competition • Fierce competition has seen large scale acquisition/partnership. The few remaining domestic players will be bought out eventually

• In the fight for market share irrational exuberance is taking hold(Distribution fees) affecting margins. A wave of consolidation is inevitable in the proceeding 3 years

Non- Life Still Greater Than Life In Turkey, But Slowly Changing

• Total non-life insurance premiums written exceeds the total life insurance premiums, with non-life business accounting for approximately 85% of total business

• Life and pensions is going to take a higher relative share given development in annuity market and pension scheme structures

Majority Of Players In The Market Are In Non-life

• As of the end of 2009 there are 57 companies operating in the market,33 of which are non-life insurance

• There is only one licensed reinsurance company in the domestic market

Education And Preferences

• Awareness of insurance is low and perception of its value questionable

• Savings mentality of “cash in the mattress” still important to consider

PEST (*) – POLITICAL – REGULATION (1 OF 2)

• Insurance Supervision Board, under the General Directorate of Insurance of the UT, established in 1963 supervises all insurance activities in Turkey

• Whilst compared to some countries, the issues are less acute, confidence in Turkey’s government has been questionable, however the tide may be turning

• Referendum on September 12 to vote on significant changes to the 1982 constitution (long criticised for a bias towards military influence on politics, weak protection of personal freedom and articles that could hinder the process of accession into the EU)

• The anticipated accession of Turkey to the EU has engendered rapid regulatory change to ensure EU standards

• Including transition to IFRS and reserving standards• Driven by Turkey’s obligations to the EU, and to fulfil one of its commitments to the IMF, Turkey

passed Insurance Law No. 5684 on 14 June 2007 which is the principle law governing insurance• Secondary legislation was largely completed in 2008 and in 2009 was generally implemented• The regulation provides a legislative basis in harmony with EU regulations and should provide the

foundation for continued growth• Covers insurance companies, agencies, brokers, actuaries and consultants, reinsurers and the

Association of Turkish Insurance and Reinsurance Companies• Law is very pro- consumer, including requirement to explicitly state uncovered risks. Similarly in

India, the regulator has not permitted free wording• The law introduced a number of compulsory insurance types:

• TPL vehicle (personal, public transport), commercial (Dangerous materials, bottled gas), finance leased goods, transport of goods- aviation/ships, professional liability for brokers), earthquake (Turkish Catastrophe Insurance Pool “TCIP”- discussed on proceeding page) and workers comp (Only from the state but optional private may be provided)

(*) PEST is an acronym for a macro based analysis - Political, Economic, Social and Technological

PEST – POLITICAL – REGULATION (2 OF 2)

• And introduced a number of funds and centres: • TCIP, Agricultural Insurance Pool, Turkish Motor Insurance Bureau, Guarantee Fund,

Insurance Arbitration Centre• See author’s summary of Turkish insurance law for more details on provisions

• Pricing control in general insurance• Opening up of free tariffs (TPL vehicle in 2007) has intensified competition. This is viewed as a

first step taken towards complete deregulation of the rates schedule• But this does not mean free pricing, under the new system, the Treasury sets base prices but

insurers are allowed to charge premiums within a band ranging between ‐ 5% and +10% of those

• India has undergone a similar process and the consequences were telling. De-tariffing was introduced in January 2007 and price changes in profitable lines were so dramatic and have impacted premium growth to the extent that the regulator intervened 8 months later in September and capped maximum discounts at 52.5%

• Because of change in regulation in 2008 for Provisions for Unearned Premiums and Outstanding Losses, technical provisions within short term liabilities has increased in recent years

• The amendment affected especially the amount of provisions for Unearned Premiums and Outstanding Losses, this has hit unearned premiums hardest

• There was an increase of 23% in technical provisions in 2008 compared to previous year• No limit in FDI per company and effectively no barriers to entry

• Foreign Direct Investment Law number 4875 states that it is free for foreign investors to engage in FDI in the Republic of Turkey with no restriction on foreign ownership and no need to seek permission from the Undersecretariat of Treasury

PEST – POLITICAL - REGULATION - TURKISH CATASTROPHE INSURANCE POOL (TCIP)

• Prior to the 1999 Marmara earthquake, Fire insurance policies used to cover the earthquake risk in Turkey

• The TCIP started operation in 2000, based on the California Earthquake Authority and New Zealand Earthquake and War Damage Commission.

• The aim of the TCIP is to:• Transfer the national risk to world-wide risk sharing pools under the management of the international

reinsurance • Provide minimum amount standard insurance for residents living in different risk zones• Provide earthquake coverage of $30k per housing unit with a deductible amount of 2%

• Governance• Leadership: Board of members, who represent government, academia and insurance companies• Administrative power: General Directorate of Insurance the Prime Ministry Undersecretariat of the

Treasury• Pool Manager: Garanti Insurance (Since August 2005)

• Terms of TCIP• Coverage: Earthquakes, fires due to an earthquake, explosions and landslides following an

earthquake• Contract duration: one-year• Cover: Losses of residential buildings within the municipality borders

• It does not offer any coverage for the rural areas or for the building contents• Tariffs: 15 which are calculated annually according to 5 earthquake risk zones and three types of

buildings. The insured value of a property is decided by (cost per square meter * square metres * tariff)

PEST – ECONOMIC - COUNTRY RISK ANALYSIS• Turkey has high levels of political and financial system risk. The

vast majority of countries in the Middle East & Northern Africa region are either CRT-3 or CRT-4 (Best ranking)

• In 2009, the Turkish economy, like most of Europe, experienced a sharp decline in economic growth, contracting by more than 5%

• The cycle nadir for 2010 was forecasted with economic growth initially muted at 1% for 2010; in fact Q1 growth was 11.7%

• Historically inflation has been a concern, being both high and volatile

• In 2007, inflation hit a 30 year low of ~8%, but in 2008 was in the double digits again

• A combination of global economic stagflation, with restrained world commodity prices should slow inflation, unfortunately the underlying demand drivers may not oblige

• The economy has experienced erratic growth over the preceding years due to a fundamentally underdeveloped banking system, large current account deficits, and a lack of structural reforms

• In 2009, amazingly, the deficit decreased 67% to $13.9bn over 2008’s $42bn

• Turkey seeks accession to the EU and while talks have commenced some strong opposition amongst current EU members suggests that accession will most likely not occur in the near term

• Issues such as the status of Kurds in Turkey and the political treatment of Cyprus have detrimentally impacted their prospects

Source: AM Best Country Risk Profile

AM Best Risk Position

PEST – ECONOMIC - SUMMARY• Gross Domestic Savings and GDP

• GDP growth has historically been strong in Turkey, but structurally there are issues. The possibility of Turkey continuing with strong GDP expansion around 7-8%, if it retains current levels of savings of ~17% of GDP (26% in 1988), is low

• Turkey is services led (Which is a decent unemployment sponge) constituting over 60% of GDP with industry ~28% (Manufacturing 18%)

• FDI (inward)• Economic prosperity has been directly tied to Turkey’s success in attracting foreign capital• After surging in 2005 and peaking in 2007, FDI plummeted during the 2008-2009 global economic

crisis in tandem with the global FDI trends• According to most recent Undersecretariat of the Treasury data, the decline has continued into 2010,

as total IFDI during January-May decreased by 34% over 2009• Culturally there is ingrained suspicion (fears of exploitation and domination) of foreign corporations in

Turkey, and given the still fragile economic/political stability, the resurgence of IFDI to 2007 levels is far from assured, though, likely to continue

• Employment• Turkey’s chronically high unemployment rate dropped to 12% in April 2010, and has been one of the

biggest issues in the economy, hitting 16.1% in February 2009• Of late, the recuperation in industrial output and exports played a major role in increasing

employment• Inflation and interest rates

• During the financial crisis of 2001, the Lira experienced a radical devaluation, the rate of inflation exceeded 100% for a time. Since then, however, Turkey’s inflation has declined more than tenfold, but with the increase in FDI and decreasing risk factors has lead to a Lira overvaluation

• Interest rates are high for a number of reasons, including inflation, savings/investment gap etc.• Some analysts worry policymakers are driving up interest rates as part of a disinflation program. • According to the Central Bank of Turkey, the annual expected rate of inflation grew from 7.34% to

7.5% in September• The expected current account deficit (CAD) for 2010 is $33.7bn and economic growth is 5.5%

PEST – ECONOMIC - COMPARISON

-6

-4

-2

0

2

4

6

8

10

12

2002 2003 2004 2005 2006 2007 2008 2009USA Euro Area Japan Turkey

-5

0

5

10

15

20

25

30

35


-10

-5

0

5

10

15

20

25

30

35

2002 2003 2004 2005 2006 2007 2008 2009GDP End-Year CPI Inflation Rate Unemployment Rate

Source: International Monetary Fund, World Economic Outlook Database, April 2010

CPI Inflation rate EoY %

Real GDP %

Overview of Turkey %

Unemployment Rate %

• Inflation decreased substantially in 2004 and has trended steadily at a premium to other countries, which has been supported by a resulting GDP growth premium, but since 2007, GDP has fallen with the market and is in fact less than the US in 2009

• The high unemployment rate is likely going to be an issue for social cohesion as Turkey looks to grow

0

2

4

6

8

10

12

14

16


PEST – SOCIAL - SUMMARY• In sum, insurance is a small and growing sector, but rising income levels, availability of financing

and changes in lifestyles/ aspirations will drive consumer demand over the next few years, increasing penetration for most consumer products

• Insurance coverage in Turkey is very low, although comprehension of insurance does not appear to be the reason for this

• Predominant information sources are agents (37%) and friends (33%) according to Nielsen survey• In aggregate 27% of people learnt about insurance directly from insurers (Traditional media, TV and

insurers websites)• Those that do not have insurance find their financial status (60%) to be the key element (Which given

economic turbulence is ominous) or that social security will cover them (33%). The remainder alternatively don’t see the point or think they will manage better themselves

• Future purchases however, will be orientated around private health, life and pension products, with accident, housing and earthquake smaller contributors, but with larger growth from the base level of prior purchases

• Key social factors are:• Men are the largest insured group by sex• 16-24 year olds are the least covered insurance group, with other groupings (25-34, 35-44 and 45-64)

holding largely equal average holding• Other than in certain branches such as household, accident and private pensions

• Education plays a key role in insurance with high school and higher recipients holding 86% of coverage

• Less educated people have highest coverage in personal accident and workplace insurance• Social economic status is a telling factor in insurance, with AB and C1 holding 84%• Self employed and full time employed are the largest group by profession, particularly in workplace

insurance• Married people are the highest insured at an average 71% across branches

Source: Sigorta Tutum ve Davranış Araştırması, Nielsen 2008. Translated by author from Turkish

PEST – SOCIAL – INSURANCE AWARENESS• Private pensions in total are the most known products, with comprehensive car insurance

being the strongest unaided line (See categorisation of ‘unaided’ and ‘Total’ below)• Peculiarly TPL auto insurance is half as know as comprehensive, and despite being

mandatory for homes, only one in five people unaided were aware of earthquake insurance• The government is aware of the lack of take-up of mandatory insurance and is

endeavouring to increase this in the years to come

Insurance Awareness of Insurance (% N=3033)


46

41.8

40.1

35.8

32.1

24

24

22.3

16.3

2.2

2.1

2.1

0.8

92.6

96.2

93.4

91.7

88

83.6

83

86.1

76.6

44

50.8

44.3

20.4

0 10 20 30 40 50 60 70 80 90 100

Car- Comprehensive

Individual Retirement

Life

Private Health

Housing

Workplace

Car- TPL

Mandatory Earthquake

Personal Accident

Education

Travel

Agriculture

Liability

Unaided Total

1. Unaided

• Without assistance surveyed were initially asked to indicate is they knew various insurance products

2. Total (Prompted)

• Surveyed were finally provided an information card and asked whether they had heard of the insurance

Survey Method

PEST – SOCIAL – SEX

• Ownership of insurance is much higher in men than women (65/35%)• This is most acute in workplace insurance (85%) and third party liability car insurance (75%)

• Given this trend, some companies have begun focusing on women with targeted advertising

Men vs. Women Ownership of Insurance (% N=749)

65%

81%

75%

74%

71%

70%

63%

61%

58%

58%

35%

19%

25%

26%

29%

30%

37%

39%

42%

42%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total

Workplace

Car- TPL

Personal Accident

Car- Comprehensive

Life


Housing


Special Health

Men Women


PEST – SOCIAL – AGE

• The 16-24 are the smallest holders of insurance, however health and life insurance are held by 21% and 27% respectively

• 25-34 year olds have the largest stake of individual retirement (private pension) insurance

• 35-44 year olds have ~30% holding share across the range of branches (Min/max: 29/39%) with a 39% stake in personal accident

• 45-64 year olds have large shares of compulsory earthquake and housing insurance which is logical, at 40% and 41% respectively

Age Ownership of Insurance (% N=749)

15%

27%

21%

20%

11%

9%

9%

8%

8%

7%

28%

30%

32%

23%

16%

24%

17%

26%

32%

39%

28%

21%

26%

39%

33%

32%

33%

34%

28%

34%

29%

22%

21%

19%

40%

35%

41%

32%

33%

19%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total

Life

Private Health

Personal Accident


Car- TPL

Housing

Car- Comprehensive

Workplace


16-24 25-34 35-44 45-64


PEST – SOCIAL – EDUCATION

• Approximately 45% of all insurance is held by university and master’s graduates, with 41% being held by those with high school education – 86% in total

• Primary and ‘medium’ school recipients hold on average 14% of insurance implying a direct correlation between education and coverage

• The highest coverage of 18% is in workplace insurance and 15% in personal accident

Education Ownership of Insurance (% N=749)

5%

9%

6%

6%

6%

5%

4%

3%

2%

1%

9%

9%

8%

6%

5%

4%

9%

12%

3%

5%

41%

44%

36%

31%

38%

39%

40%

36%

35%

50%

45%

39%

50%

57%

51%

51%

47%

49%

61%

45%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total

Workplace

Car- TPL

Housing

Car- Comprehensive



Personal Accident

Private Health

Life

First Medium High School Uni and Msc


PEST – SOCIAL – SOCIO ECONOMIC STATUS• AB group has the largest coverage with the exception of commercial insurance, and are

particularly strong in private health

• C1 have and average holding of ~40% with a 50% share of workplace insurance

• C2 individuals are underserved in disaster insurance (likely linked in part to property ownership), but have their highest relative ranking in personal accident

• Average person income per year is TL 2,066 (*)• Average income for AB is 1.5x C1 and 2.0x C2

SES Ownership of Insurance (% N=754)

Source: Sigorta Tutum ve Davranış Araştırması, Nielsen 2008. Translated by author from TurkishNote: (*) Average income excludes people who replied no answer and don’t know.

45%

62%

55%

54%

51%

51%

48%

47%

43%

35%

39%

29%

33%

37%

37%

42%

26%

38%

43%

50%

16%

10%

12%

10%

13%

7%

25%

14%

15%

15%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total

Private Health

Housing


Car- Comprehensive


Personal Accident

Car- TPL

Life

Workplace

AB C1 C2

Average IncomeSES Income TL

AB 2,606

C1 1,781

C2 1,324

14%

20%

17%

17%

15%

12%

11%

5%

5%

4%

8%

14%

6%

2%

13%

7%

9%

2%

4%

2%

3%

1%

3%

4%

0%

2%

2%

0%

1%

8%

38%

37%

22%

35%

37%

47%

45%

82%

38%

35%

32%

25%

45%

40%

29%

26%

28%

9%

38%

42%

7%

4%

7%

2%

5%

5%

6%

2%

14%

9%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total

Housing

Private Health



Car- Comprehensive

Car- TPL

Workplace

Personal Accident

Life

Housewife Retired Temp. Unemployed Self Emplyeed Full Time Student

PEST – SOCIAL – PROFESSION• Self employed are the largest group, dominating workplace insurance, car (comprehensive and TPL)

• Full time employees are the second largest group, particularly in private health and pensions

• Housewife insurance is linked to home, health and pension with retirees focusing home on earthquake

• Students are the second smallest group, but the third largest in personal accident

• Temporary unemployed are the smallest group by some margin, but interestingly, along with students, have ~8% life insurance share

Professional Ownership of Insurance (% N=749)


PEST – SOCIAL – MARITAL STATUS

• Married individuals constitute 71% of insureds and generally dominate across the branches, particularly in house and car related insurance

• Single insureds have a larger share (35%-47%) in life, pension and health insurance but do not have an equal share in any line

Marital Status Ownership of Insurance (% N=749)


71%

82%

80%

79%

79%

74%

69%

66%

61%

53%

30%

19%

20%

21%

21%

26%

31%

34%

39%

47%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Total

Housing


Car- Comprehensive

Car- TPL

Workplace

Personal Accident


Private Health

Life

Married Single

PEST – TECHNOLOGICAL - SUMMARY

• System investment• The level of investment in banking IT systems has not been matched in insurance• Indeed, banking systems are complex but the requirements for insurers are equally so,

particularly in the age of heightened internal control requirements• This is particularly the case for both domestic companies and foreign players operating in

partnership, where IT systems may not be adequate, requiring investment and development• Automation of processes and CRM

• Off the shelf and bespoke software enables insurers to more rapidly process large volumes of applicants and manage insureds

• Best practice abroad will increasingly be implemented in Turkey and foreign entrants have the opportunity to move their partners up the tech-tree and increase efficiency (As above)

• Computing power• Advances in computing have facilitated greater depth of data analysis underpinning

underwriting processes for companies desiring to develop a competitive advantage• Direct and internet distribution

• The proliferation of the internet has laid the foundation for online insurance distribution, however given the nascent nature of the industry, knowledge of insurance, per se, is under-developed

• Once comprehension increases, online sites (including comparison ones) will proliferate. • Direct, telephone marketing will grow concurrently

• Internet driven information era• Ability to more rapidly access comparative information of insurers will engender even more

competitive pricing for consumers

5-FORCES (*) (1 0F 2)Force Analysis ThreatThreat of new entrants

• New entrants persist annually, with recent additions from Dubai, Coface etc. • There are minimal barriers to entry to the Turkish market• Insurance cannot be tied to other services in bancassurance for example (mortgage

insurance), there are emerging leading brands, but little loyalty, minimal switching costs and unprohibitive legislation (Capital requirement is not too high)

• Whilst insurance is a scale business, there are enough large insurers globally who all want a piece of Turkey. Requirements to obtain licences to operate are not impossible to obtain (As they were in China for AMC initially)

• There are no discernable profitable niches insurers operates in that should fear new entrants; it is across all branches; credit insurance with only 15 operators has been generating underwriting losses for example. Having said that, no premiums have been generated in the support branch

Power of Suppliers

• Defining suppliers as insurers and capital providers, none have much control over the market. There is already an excess of capital and plenty to be found to support growth as needed

• The market of insurers is highly fragmented with little concentration• Outsourcing is generally low in Turkey at present although third parties such as IT

providers are utilised. There is little power here• In terms of human capital there is limited supply but little anecdotal evidence to assert

there is a battle for talent as of yet (underwriters being poached)• There is only one reinsurer licenced in Turkey with 30% of the market, but global

cession is permitted• The residual market is dealt with entirely by the Undersecretariat funded by insurers• Smaller incumbents are aware they lack the firepower so whilst their relative power is

limited it will not be for long as they receive endless proposals from foreign insurers• Structurally there is little ability to create “power”; many suppliers and substitutes,

low switching costs in GI, penetration is low other than in compulsory insurance and no intermediaries to consumers to speak of

(*) 5-forces is an industry level analysis with 4 factors impacting the resultant degree of industry-competitive rivalry

5-FORCES (2 0F 2)Force Analysis ThreatPower of Buyers

• Personal lines do not pose a threat to the insurance industry • Given the nature of the industry, commercial lines do not have excessive pricing control. As

a commoditised product there is little latitude in tariffs, and insurers are aware of maintaining their LOR (thought there are invariably insurers that will sacrifice growth for profit). There are limited large commercial line customers to be fought after to gain the “millions in premiums”

• As the insurance market matures, supported by information availability through the internet, price and service can be easily compared. This taken together with high price elasticity increase bargaining power of customers

• In terms of distribution, there are multiple channels. Banks (bancassurance) are in the driving seat, spoilt with choice. Insurers cannot directly control brokers and agents but certainly can compete for them

Availability of Substitutes

• There are innumerable substitutes (Or as of 2009, 37 GI insurers) in the market and the majority of which offer the same suite across the same branches

• There are a few specialty insurers in the market in single lines, but empirically have not demonstrated competitive advantage, the niches are small and furthermore there are not barriers to entry

Degree of Competitive Rivalry

• In the face of a growing, large market, competition to become a leading player in Turkey is incredibly fierce. With little ability to differentiate, and selling a commoditised product, the general insurance market is difficult

• Rivalry is much higher in the non life market than the life one• Majority of players are global heavyweights implying little differentiation. Due to penetration

competition is for new customers, rather than stealing existing ones from one another• Success is a two phase notion. Initially, brand building is integral with best access to

distribution to drive GWP. Low cost structure, greater efficiency and better customer service will beat out competitors eventually and aid in generating underwriting result across the cycle. This is to be supported by strong investment generation capabilities. In the second phase, applying hitherto generated underwriting knowledge to minimise the LOR and effective cost control to minimise COR will support further market penetration to cement market position

SWOT (*) - STRENGTHS/OPPORTUNITIES

• Intense competition arisen from deregulation is promulgating innovation; from underwriting, marketing and insured servicing and rights

• Innovations in distribution and improvements in market penetration will follow resulting in new channels, particularly in the direct and online space

• Aggressive insurer marketing budgets and government education programs will buoy consumer awareness of the industry and expand the market

• A highly deregulated environment and increasingly liberated tariff control will allow market forces set premiums according to their strategy and further differentiate themselves

• Liberalisation in the future away, from the state in certain branches, will create new channels of insurance

• Allowing insurers to issue their own policy wordings and remove unlimited exposure clauses will enable underwriters to tailor products to customers more easily

• Undersecretariat reporting requirements ensure significant market transparency

• Relatively stringent capitalisation requirements are key to licence renewal and ensures that rogue companies will not undermine the market and strengthen scepticism of financial companies and foreigners

• All insurance participants, including agents, brokers, actuaries and advisors are governed by law and regulated ensuring a duty of care

(*) SWOT is an acronym for a company/industry level analysis – Strengths, weaknesses, opportunities and threats

SWOT - WEAKNESSES/THREATS

• Profitability likely to remain low as premiums rates will remain under pressure due to intense competition, particularly in the main lines (Vehicle, general insurance and mandatory insurance lines)

• Future of reinsurance questionable in a highly ceded market• As the market becomes more deregulated, costs may rise as treaty reinsurers reduce

ceding commissions to compensate for the lower rates• Reliance on transfers to new assets from investment performance to compensate for

marginal underwriting results subject insurers to the volatility of the financial markets which are still recovering

• Overcapitalised market means that insurers are likely not generating an adequate return on capital and may lead to volatility and shortening of hard/soft cycles

• Traditional distribution networks, particularly agents given their dominance, need to be further educated and increasingly match future product offerings

• Natural catastrophes are an issue in Turkey particularly earthquakes, whilst there is the TCIP, given the nature of insurance contracts, insurers have to be aware of possible obligations

UNDERWRITING RESULTS GENERALLY COMPRESSED

Underwriting Result

• Growing GWP but at lower tariffs due to excessive competitive pressure in many insurance segments

• COR increased in 2005-10 due to several major claims

• Some other segments are also experiencing increasing benefit payments (e.g. health)

• No sustainable progress made in cutting administrative costs

• Growing GWP but at lower tariffs due to excessive competitive pressure in many insurance segments

• COR increased in 2005-10 due to several major claims

• Some other segments are also experiencing increasing benefit payments (e.g. health)

• No sustainable progress made in cutting administrative costs

Investment Return

• A downturn in the equity markets continues in the light of the persistent economic and investor confidence crises

• Low interest rates continue to reduce possibilities for attractive investments

• Write off on securities has arguably not yet been fully effected

• A downturn in the equity markets continues in the light of the persistent economic and investor confidence crises

• Low interest rates continue to reduce possibilities for attractive investments

• Write off on securities has arguably not yet been fully effected

The traditional offsettingof underwriting result loss is

becoming increasingly difficult

Increasingly weak underwriting result

Declining earnings from capital investments

VALUE CHAIN

Sales Channel

Mark-etingMark-eting SalesSales Cust.

SupportCust.

Support

Product Prod. Dev.Prod. Dev. BrandBrand Asset

Mgmt.Asset Mgmt.

Platform/Transacti

on

UnderwriteUnderwrite

Admin/ClaimsAdmin/Claims

EORMgmt.

LOR Mgmt.

• The areas of value chain for developing core competences to manage COR are presented below, grouped into 3 specialisms

• Only the largest companies can competently cover the whole value chain• This is the reason for the significant “sell outs” by domestic players

• Companies are polarised to some extent between sales and product focus, as can be seen by the use of marketing staff

• Some companies such as AXA, Allianz and Groupama have no marketing staff whereas others such as Anadolu do and so focus on a sales channel specialism to gain market share rather than outsourcing it

• Many may just see the sales channel as a large cost centre

Source: Model fundamentally based on Roland Berger analysis

Disaggregated Value Chain for COR Analysis

INTERNATIONAL INSURANCE COMPARISON - TOTAL

Premiums (USDm) Real growth Share of world market (%)

Premiums in % of GDP

Premiums per capita (USD)

Turkey 8,400 9.09 0.21 1.44 115.7

America 1,349,495 -6.14 33.19 6.91 1,470.2

North America 1,238,586 -7.08 30.46 7.94 3,634.5

Latin America and Caribbean 110,910 5.75 2.73 2.82 192.2

Europe 1,610,620 1.83 39.61 7.58 1,861.5

Western Europe 1,525,953 2.61 37.53 8.46 2,922.4

Central and Eastern Europe 84,667 -10.86 2.08 2.75 262.7

Asia 989,451 2.78 24.33 6.08 243.1

Japan and newly industrialised Asian economies 699,012 -0.42 17.19 10.33 3,307.6

South and East Asia 261,887 12.14 6.44 3.43 74.0

Middle East and Central Asia 28,552 3.40 0.70 1.54 92.0

Africa 49,287 -11.13 1.21 3.26 48.8

Oceania 67,241 -9.57 1.65 6.24 1,862.9

World 4,066,095 -1.07 100.00 6.98 595.1

Industrialised countries 3,532,716 -1.78 86.88 8.61 3,404.9

Emerging markets 533,379 3.53 13.12 2.89 91.5

OECD 3,466,714 -2.04 85.26 8.20 2,808.4

G7 2,744,580 -2.41 67.50 8.71 3,670.8

Euroland 1,074,916 7.34 26.44 8.04 3,058.5

EU, 27 countries 1,481,834 2.15 36.44 8.42 2,774.6

NAFTA 1,255,938 -6.88 30.89 7.63 2,788.5

ASEAN 44,669 3.23 1.10 2.97 83.4

Total Insurance Growth, Penetration And Density By Region (2009)

Source: Swiss Re, Economic Research & Consulting, sigma No. 2/2009. For Turkey, data was backed out from stats from Undersecretariat of Treasury Report 2009 and therefore there are errors from rounded data

INTERNATIONAL INSURANCE COMPARISON – NON-LIFE

Premiums (USDm) Real growth Share of world market (%)

Premiums in % of GDP

Premiums per capita (USD)

Turkey 7,100 5.97 0.41 1.22 97.80

America 769,869 -1.00 44.38 3.94 838.80

North America 702,584 -1.50 40.51 4.50 2,061.70

Latin America and Caribbean 67,285 4.30 3.88 1.71 116.60

Europe 657,105 -1.20 37.88 3.05 750.60

Western Europe 590,433 -0.50 34.04 3.22 1,111.30

Central and Eastern Europe 66,672 -7.50 3.84 2.16 206.90

Asia 257,184 5.60 14.83 1.57 62.80

Japan and newly industrialised Asian economies 160,946 2.20 9.28 2.35 753.80

South and East Asia 74,532 13.90 4.30 0.98 21.10

Middle East and Central Asia 21,706 4.70 1.25 1.17 70.00

Africa 16,723 0.40 0.96 1.10 16.60

Oceania 33,649 2.90 1.94 3.12 932.20

World 1,734,529 -0.10 100.00 2.98 253.90

Industrialised countries 1,485,759 -0.60 85.66 3.60 1,424.90

Emerging markets 248,770 2.90 14.34 1.35 42.70

OECD 1,491,240 -0.70 85.97 3.51 1,201.80

G7 1,170,656 -1.30 67.49 3.65 1,539.00

Euroland 446,144 0.40 25.72 3.40 1,293.50

EU, 27 countries 575,050 -0.70 33.15 3.20 1,054.50

NAFTA 712,249 -1.30 41.06 4.33 1,581.40

ASEAN 16,417 5.30 0.95 1.00 28.00

Non-Life Insurance Growth, Penetration And Density By Region (2009)

Source: Swiss Re, Economic Research & Consulting, sigma No. 2/2009. For Turkey, data was backed out from with stats from Undersecretariat of Treasury Report 2009 and therefore there are errors from rounded data

EU NON-LIFE INSURANCE PENETRATION COMPARISON

Non-Life Penetration and Growth (Sorted by 1999 Level)


• It is worth examining penetration of non-life insurance in Turkey in greater detail

• Calculated as premiums to GDP• Since 1999, Turkey has had the lowest penetration in all of Europe, though growth is the 4th highest

on a CAGR basis (4.3%)

• This serves to indicate the huge potential of the market

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

1999 2008 2008 Average 1999 Average CAGR (1999-2008)

EU NON-LIFE INSURANCE PREMIUM PER CAPITA COMPARISON

Average Non-life Premiums Per Capita (Sorted by 1999 Level)

Source: Analysis of CEA Statistics N°40: European Insurance in Figures, Data 1999-2008. Note axis has been capped for 2008 to aid visibility

• Premiums per capita are drastically low in Turkey too

• In 1999, Turkey had the 3rd lowest level and in 2008 now has the lowest• Growth has been fairly high at 13.7% CAGR (off a very low base) but this has been at the 7th

fastest, implying it has not kept up with other developing markets

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0

300

600

900

1,200

1,500

1,800

1999 2008 1999 Average 2008 Average CAGR (1999-2008)

€ per capita

INTERNATIONAL INSURANCE COMPARISON – GROWTH IN NON-LIFE

Non-life Premiums Growth Rates Versus Average Growth By Region

Source: Swiss Re, Economic Research & Consulting, sigma No. 2/2009. For Turkey, stats were utilised from Undersecretariat of Treasury Report 2009, 2008 and 1999 and taken total non-life premiums including those generated by life and pension business. Ordinarily in this report these are omitted

Growth Rate 2009

Annual Average

Growth Rate 1999-2008

Graphical Overview

Turkey 2.7% 32.7%

World -0.1% 3.3%

Industrialised countries -0.6% 2.7%

North America -1.5% 2.6%

Western Europe -0.5% 3.5%

Continental Europe 0.1% 3.4%

Japan / newly industrialised Asian economies 2.2% 0.9%

Oceania 2.9% 2.2%

Emerging markets 2.9% 9.3%

South and East Asia 13.9% 12.0%

Latin America and the Caribbean 4.3% 6.3%

Central and Eastern Europe -7.5% 10.7%

Africa 0.4% 6.6%

Middle East and Central Asia 4.7% 10.2%

-10.0% 0.0% 10.0% 20.0% 30.0% 40.0%

Growth rate 2009 Annual average growth rate 1999-2008

• Explosive historic growth has slowed in adverse market conditions (with life growing faster) though is line with other emerging markets

• South and East Asia have faired well, but are larger markets so have more latitude for growth

GLOBAL PREMIUM COMPARISON• Global insurance premium production in 2009 was $4.1tn with 4.77% decrease on 2008

• Non-life insurance premium was $1.7bn with a gross annual decrease of 3.16%

• Real negative growth rates were less than gross in lieu of the credit crisis

• Turkey is similar in developments to other emerging markets, however, in 2008 non-life insurance premium decreased in Turkey

• The following graphs show a comparison of real growth rates in developed countries, emerging markets and Turkey since 2005 and premium production for developed countries and emerging markets

%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2005 2006 2007 2008 2009

Turkey Industrial countries Emerging markets

Real Growth Rates of Premium Premium and Allocation (2009)(USD bn) Non – Life % Sector % World

Industrialised Markets 1,486 86%United States 647 44% 37%Japan 107 7% 6%United Kingdom 92 6% 5%France 89 6% 5%Germany 127 9% 7%Italy 54 4% 3%Hong Kong 3 0% 0%Emerging Markets 249 14%Latin America and Caribbean 67 27% 4%Central and Eastern Europe 67 27% 4%South and East Asia 75 30% 4%Middle East and Central Asia 22 9% 1%Africa 17 7% 1%World 1,735Turkey 11 4% 1%

Source: Sigma Magazine, World Insurance in 2009, No: 2/2010 Note: Turkey % sector is emerging markets

• European direct premiums have grown at a CAGR of 5%

• Turkey has faired better growing at 12%

• Turkey’s share of direct premiums has grown at a CAGR of 7%, growing from a 0.68% share to 1.28% in 2008 to place it as the 13th largest market on this basis

€m

EU Direct Premiums and Turkey as a % of Europe


NON-LIFE EU PREMIUM COMPARISON

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

0

50,000

100,000

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

EU Total Premiums Turkey % of Europe

GENERAL INSURANCE STATS

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0%

20%

40%

60%

80%

100%

120%

140%

Increase (%) Direct Premiums

0%10%20%30%40%50%60%70%80%90%

100%

Direct Premiums Premium Receivables

0

1,000,000

2,000,000

3,000,000

4,000,000

0%

100%

200%

300%

400%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Increase (%) Participation

0

1,000

2,000

3,000

4,000

0%

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100%

150%

200%

Increase (%) Premium Receivables

0%

50%

100%

150%

200%

Increase (%) Inflation (Wholesales)(1) (%)

Direct Premiums (TL & %)

Direct to Receivable Premiums

Premium to Inflation (%)

Premium Receivables (TL & %)

Participation (TL & %)

Source: Sigortacılık Genel Müdürlüğü, 2009 data Note: (1) Wholesale insurance = PPI (12 Months percentage increase in PPI) Source - TURKSTAT

GENERAL INSURANCE ASSET STRUCTURE

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0%

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Increase (%) Equity Capital

05,00010,00015,00020,00025,000

0%

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150%

Increase (%) Assets

0

2,000

4,000

6,000

8,000

0%

50%

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Increase (%) Securities Portfolio

-400

0

400

800

1,200

1,600

-100%

0%

100%

200%

300%

400%

Increase (%) Fixed0%

10%20%30%40%50%60%70%80%90%

100%

Equity Capital Assets Fixed Securities Portfolio

Asset Structure (%)

Equity Capital (TL & %)

Fixed Assets

Securities Portfolio (TL & %)

Assets (TL & %)

Source: Sigortacılık Genel Müdürlüğü, 2009 data

PREMIUM VOLUME AND COVERAGE

• In 2009, total insurance premium in non life grew to TL 10.6bn with direct premium production prior to cession at TL 10.4bn

• Total coverage in 2009 reached to TL 24.2bn (excluding health/sickness classes as most have unlimited coverage)

• The delta between coverage and premiums can be explained by failing tariffs

• Whilst nominally positive, direct premiums have not been able to keep up with inflation, decreasing in real terms in both 2008 and 2009

Total Gross Premium and Coverage Direct Premium & Real/Nom changeTKL m %TKL m TKL m

0

5

10

15

20

25

30

0

5

10

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20

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30

2005 2006 2007 2008 2009

Non-Life Premium Non-Life Coverage (*)

-5%

0%

5%

10%

15%

20%

25%

0

2

4

6

8

10

12

14

2005 2006 2007 2008 2009

Life Direct Premium (bn) Non-Life Direct Premium (bn)Nominal Change (%) Real Change (%)

Reducedpricing

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data Note: (*) Whole coverage amount given for bodily injure in third party liability insurance has been included in total since 2008. It has about 40% share in total coverage amount in those years.

PREMIUM VOLUME FALLING IN REAL TERMS

• Insurance is a financial sectors which is highly elastic to GDP with rapid and levered impact to change and development in the economic environment

• When GDP grows, insurance premium growth exceeds that of GDP, but the fall in GDP leads to a higher shrinkage in insurance market

• The situation was reversed only in 2008 when non-life premium production fell in real terms despite the GDP growth

• The following graph show growth and decline in rates of direct premium volume in real and nominal terms for the preceding ten years

Real and Nominal Growth Rates of Premium in Non-Life (*) Branches%

-20

0

20

40

60

80

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Real Growth Nominal Growth

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data Note: (*) Whole coverage amount given for bodily injure in third party liability insurance has been included in total since 2008. It has about 40% share in total coverage amount in those years.

CYCLICALITY – PREMIUM GROWTH DOES NOT ALWAYS KEEP UP WITH GDP

• The following graph shows direct premiums (Turkish insurance industry) vs. constant price GDP growth and indicates that, during a soft cycle, premium growth can fall below GDP growth

• When this occurs it can indicate that price per unit of risk is declining since demand for insurance tends to grow at, or slightly higher than, the overall economy

• This phenomena also leads claim cost growth to outpace premium growth ~50% of the time in more mature markets

• Turkey is no exception to cyclicality with approximately four soft periods since 1982• Interestingly two of these periods occurred during hard cycles in the USA• However, whilst the US has averaged annual growth of ~6%, Turkey has averaged ~64%!

• GDP and premium growth are closely correlated with a r2 of 87%

Growth Rates of Premiums and GDP in Non-Life Branches%

0%

20%

40%

60%

80%

100%

120%

140%

Direct premium change Gross domestic product, current prices change

r²

87%

Forecasted

USA up cycleUSA up cycle

Softening Softening SofteningSoftening

Source: International Monetary Fund, World Economic Outlook Database, April 2010, TSRB and Sigortacılık Genel MüdürlüğüNote: Premium forecasts from 2010 to 2015 have been derived from IMF forecasts through linear regression

0%

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100%

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250%

0%

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60%

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1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Direct Premiums Gross domestic product, current prices change Equity Capital

CYCLICALITY – INDUSTRY-WIDE SURPLUS GROWTH LEADS TO LOWER PRICING

• While no two cycles are the same in amplitude and length, price declines inevitably follow periods of surplus growth (and normally strong pricing)

• Surplus is a good measure of underwriting capacity and therefore supply• Changes in surplus are the key driver of the insurance pricing cycle• The cyclicality of ROE is not only driven by lower prices but by equity bases that grow rapidly

during a hard market• The following graph shows the relationship between equity capital (proxy for surplus) and direct

premiums. Hard markets are evident following sharp increases in equity capital• It is possible that we may be presently entering a hard market

• Soft cycles tend to end when underwriting losses deplete surplus and can be accelerated by catastrophic events (such as a financial crisis, or more typically a natural one)

Surplus to Premium Growth (With GDP Comparison)USA up cycle

Hard Market

Source: International Monetary Fund, World Economic Outlook Database, April 2010, TSRB and Sigortacılık Genel Müdürlüğü

Marmara and Duzce earthquake

USA up cycle Erzincan earthquake

Izmar flood

Black Sea Flood

Hard Market Hard Market

MARKET CONCENTRATION (1 OF 2)

Top 5 Top 10Accident 57% 79%

Air Vehicles 90% 99%

Air Vehicles Liability 88% 99%

Credit 96% 100%

Financial Loss 70% 95%

Fire and Natural Disasters 51% 78%

General Damages 51% 79%

General Liability 59% 83%

Health 82% 97%

Land Vehicles 54% 79%

Land Vehicles Liability 52% 75%

Legal Protection 62% 87%

Non Life Total 50% 78%

Sea Vehicles 74% 93%

Transport 49% 78%

Net Earned Premiums Premium Share by Branch in 2009

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009

% of Top 5 % of Top 10

% of Top 25 % of Top 5 Average

% of Top 10 Average % of Top 25 Average

• Concentration by premium has largely remained constant (Whereas life has become more fragmented)

• Interesting the concentration by shareholders equity increased in 2005 as foreign entrants flooded in (but this obscured slightly by an inflation adjustment inured BoY 2005) and has fallen in 2008

• One could assert that companies have recently become more evenly capitalised

Source: Sigortacılık Genel Müdürlüğü, 2009 data

MARKET CONCENTRATION (2 OF 2)

Market Share Of The Largest Non-life Insurance Groups

Premium Share by Branch in 2009

• As can be seen in the chart to the side, concentration is low in Turkey, the 13th largest and 9th fastest growing market in 2008

• It is ranked the 25th

least concentrated of 29 countries for the top-5 and 21st for the top-10

• Concentration is more similar to developed countries such as the UK than developing countries with which it has a similar distribution structure, such as Estonia which has great concentration

• Poland has similar size and growth potential and is far more concentrated

Source: CEA Statistics N°40: European Insurance in Figures, Data 1999-2008

Total non-life premiums (€m) First 5 First 10 First 15

Country 2008 2000 2008 2000 2008 2000 2008 2000Turkey 5,352 2,480 47.4% 44.9% 73.7% 70.2% 85.9% 82.0%Greece 2,596 1,267 35.0% 46.8% 56.3% 62.6% 72.2% 72.6%Spain 32,597 17,051 42.8% 27.8% 62.0% 43.2% 74.5% 55.9%Germany 84,937 70,110 43.2% n.a. 63.8% n.a. 74.4% n.a.Switzerland 15,015 10,175 46.8% 61.5% 66.7% 83.6% 79.3% 91.2%United Kingdom 61,289 55,400 47.6% 35.7% 67.1% 42.9% 75.5% 48.5%Cyprus 401 186 48.1% 46.6% 69.9% 67.7% 82.6% 79.2%France 60,826 41,082 54.8% 53.4% 74.1% 69.3% 86.4% 81.0%Portugal 4,324 3,571 63.0% 73.4% 81.8% 77.7% 94.6% 87.2%Ireland 3,334 2,964 64.0% 71.6% 92.8% 94.4% 98.5% 99.6%Bulgaria 773 176 65.3% n.a. 83.5% n.a. 84.0% n.a.Belgium 9,927 7,121 67.7% 58.0% 85.8% 76.6% 92.7% 87.0%Denmark 6,271 3,947 68.0% 72.2% 85.6% 85.8% 91.9% 92.5%Italy 37,454 27,874 69.4% 59.5% 86.2% 82.9% 91.7% 92.0%Poland 5,730 3,119 71.3% 80.6% 86.0% 90.2% 92.6% 95.8%Malta 93 85 74.1% 65.1% 19.9% 82.2% 5.8% 88.8%Latvia 449 165 74.8% 59.1% 100.0% 89.9% 100.0% 99.5%Austria 8,852 6,290 74.9% 55.4% n.a. 76.7% n.a. 87.7%Romania 1,936 n.a. 75.1% n.a. 92.5% n.a. 97.8% n.a.Croatia 988 493 79.6% 83.7% 93.4% 93.9% 98.9% 98.2%Hungary 1,706 794 79.9% 89.9% 92.5% 97.9% 97.6% 100.0%Czech Republic 3,310 1,343 80.6% 80.4% 92.8% 92.2% 94.8% 95.5%Sweden 6,983 4,749 83.5% 84.9% 93.0% 94.0% 98.1% 97.6%Estonia 245 83 84.2% 90.0% 97.8% 100.0% 100.0% 100.0%Luxembourg 705 n.a. 84.4% 83.2% 97.0% 95.7% 99.4% 99.3%Slovakia 965 375 89.1% 85.6% 97.6% 95.1% 99.2% 98.8%Slovenia 1,377 756 90.2% 94.0% 99.8% 99.6% 100.0% 100.0%Finland 3,252 2,346 91.5% 88.5% 99.4% 97.2% 100.0% 99.0%Iceland 259 249 99.0% 99.4% 100.0% 100.0% 100.0% 100.0%Liechtenstein 235 n.a. n.a. n.a. n.a. n.a. n.a. n.a.Lithuania 435 98 n.a. 71.1% n.a. 86.1% n.a. 93.4%Netherlands 50,113 18,994 n.a. 40.4% n.a. 56.8% n.a. 65.5%Norway 4,742 4,495 n.a. n.a. n.a. n.a. n.a. n.a.

413,153 287,837 53.9% 49.9% 72.3% 64.6% 81.8% 73.2%

DOMESTIC COMPETITION

• Given the penetration of foreign players, it is evident that domestic players have been unable to compete effectively alone

• Recognising the limited financial resources of Turkish companies, terms of business partnership (Joint Venture) were introduced to the Turkish Legal System with the enactment of the Communiqué numbered 2009/2

• The number of non-life companies has decreased from 56% of the market in 2006 to 35% in 2009

• Initially, domestic companies partnered with foreigners or set up joint ventures• Over time, the partnerships were bought out (Koc and Olak in 2008) and new entrants

bought majority shares• Presently there are few large domestic competitors going it alone

• Domestic companies have been historically operating in an underdeveloped and unsophisticated market, rarely venturing out of their national borders

• Foreign competitors are invariably global MNCs with considerable experience and capital resources

• Without the barriers to entry and legal requirements of some international economies, domestic players have been unable to compete; rather than be competed out of the market, they have partnered or sold

• In the future, those untied domestics will eventually be bought out

FOREIGN COMPETITION – OVERVIEW• Multinational insurers are keenly interested in emerging insurance because their home markets

are saturated, while emerging countries have low insurance penetrations and high growth rates• The charts below show the increasing dominance of foreign players in non-life on the left and in

life, pension and reinsurance on the right• Typically foreign insurers take only a small share of an individual country’s market

• In Taiwan for example, foreign companies took only a 3 per cent share seven years after opening• In Korea, their share was 1 per cent after 20 years• In China, a large and complex markets like India, private insurers have not made much headway.

In Turkey, success has been more rapid largely because of regulation differences• Unlike in India where foreign entrants must partner with domestic players and hold minority

stakes, insured have looser reigns• Minority shareholders rights are assured through Turkish Commercial Code No. 6762

0

5

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35

40

2006 2007 2008 2009

Foreign Domestic

0

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2006 2007 2008 2009

Foreign Domestic

Non-Life Number of Companies Life, Pension & Reinsurance


FOREIGN COMPETITION – SATURATION OF MATURE MARKETS

Premium Per Capita (USD) and GDP (%)

• As discussed, the lack of growth opportunities in domestic markets is driving MNC insurers further afield to gain exposure to growth

• The total Turkish insurance sector was 36th in global premiums of 88 countries with a 0.21% share in 2009

• According to premium per capita, Turkey was 65th place in 2008 with $106.2 PPC; a 6th of the world benchmark

• It reached to $113 in 2009• The attractiveness of Turkey is evident by the multiple of premium/GDP in the chart below

• Turkey is on average, 5.25x smaller than all the groupings• Even compared to other emerging markets, is less than half

Turkey Turkey World Europe Industrial Emerging Markets

$ US and % 2009 2008 2008 2008 2008 2008

Pr.Per Capita 113.0 106.2 633.9 2,043.9 3,655.4 89.4

Life 16.9 17.8 369.7 1,244.1 2,142.6 47.4

Non Life 96.1 88.4 264.2 799.8 1,481.0 42.0

Premium/GDP 1.3% 1.2% 7.1% 7.5% 8.8% 2.7%

Multiple of P/GDP to Turkey 5.70 x 6.02 x 7.10 x 2.19 x

Source: Sigma Magazine, World Insurance in 2009, No: 2/2010

FOREIGN COMPANY STRUCTURE OVERVIEW

Group 1 – Foreign Holding StructureCompany Name

Controlling Shareholder Country

Capital(TL m)

Dominant's Share (%)

Foreign Share (%)

Premium(TL bn)

Market Share (%)

AXA Axa Holding France 310 73% 73% 1,277 10.4%

Allianz Allianz Se Germany 200 84% 94% 931 7.6%

Groupama Groupama Int. France 134 64% 99% 590 4.8%

Yapi Kredi Ykb As Turkey 80 53% 27% 608 5.0%

Ergo Emeklilik Ergo Holding As Germany 60 100% 100% 23 0.2%

Gunes Vakifbank Tao Turkey 150 34% 30% 727 5.9%

Mapfre Genel Mapfre Int. Sa Spain 350 90% 81% 361 2.9%

Eureko Eureko Bv Holland 60 80% 84% 539 4.4%

Aviva Aviva Int. Hold. England 75 99% 99% 275 2.2%

Ray Tbih Fin. Group N.V. Austria 97 84% 84% 254 2.1%

Company Name

Controlling Shareholder Country Capital

(TL m)Dominant's Share (%)

Foreign Share (%)

Premium (TL bn)

Market Share (%)

Zurich Zurich Ins. Co. Switzerland 72 100% 100% 216 1.8%

Chartis Aig Memsa Hold. ABD 44 100% 100% 174 1.4%

HDI HDI Int. Hold. Ag Germany 84 100% 100% 175 1.4%

Liberty Liberty Seguros USA 183 51% 99% 46 0.4%

Generali Generali Turkey Hold. ITALYA 26 100% 100% 85 0.7%

Dubai Group Dubai Ins. Group L.L.C. Dubai 65 98% 98% 76 0.6%

Coface Coface France 18 100% 100% 12 0.1%

Group 2 – Foreign Holding Structure

• Majority of companies have controlling stakes


FOREIGN COMPETITION – OWNERSHIP STRUCTURES

Year No.of Company No.of Company with Foreign Partners

Foreign Partner's Share

100% 90%-100% 51%-90% 20%-50% < 20%

2000 62 17 2 2 2 5 6

2001 59 16 2 4 2 4 4

2002 58 15 2 4 2 3 4

2003 57 11 2 3 1 3 2

2004 58 16 2 3 2 4 5

2005 55 20 2 5 2 6 5

2006 55 24 5 4 6 8 1

2007 61 32 7 5 10 9 1

2008 62 41 16 11 7 6 1

2009 62 43 18 12 5 7 1

Number of Companies with Foreign Partners

• There were only 17 foreign shared insurance companies in Turkey in 2000, this number increased to 24 in 2006, 32 in 2007, 41 in 2008 and 43 in 2009 (Total)

• As of 2009, 24 of 37 non-life insurance companies and 19 of 24 life and pension companies were foreign owned directly or indirectly

• Share of foreign partners is above 50% in 35 of these companies with 8 holding minority stakes

• The change from minority to majority shareholdings over time illustrates growing confidence in the Turkish market- minority shares may illustrate a “dipping of toes” moving to larger shares and or standalone ambitions


FOREIGN COMPETITION – CAPITAL COMPARISON

• As a result of increase of foreign investment in Turkish insurance market, the share of foreign owned companies exceeded 50% in total capital and total premium in 2008

• See point of reversal• From 2006, the share began to substantially change

• See point of inflexion• At the end of 2009, share of foreign investment reached to 55% in total paid-in capital while

there was no big change in share for premium volume

• The following table presents foreign companies share in total capital and total premium

Premium and Paid-in Capital Comparison

0%10%20%30%40%50%60%70%80%90%

100%

2003 2004 2005 2006 2007 2008 2009

Foreign Paid-in Capital (%) Foreign Premium Volume (%) Domestic Paid-in Capital (%) Domestic Premium Volume (%)

Inflexion

Reversal


FOREIGN COMPETITION – CHANGE IN OWNERSHIP

• Examining ownership (Across all insurance lines- due to data availability) across a longer horizon (1991-2009) it is pertinent to note that ownership was largely stagnant from 1992 to 2003

• From this point there was a gentle reversal in ownership ratio which began to accelerate from 2003

• In 2005 real interest took hold seeing a point of inflexion in which foreign capital flooded in

• The following table presents foreign companies share in total capital and total premium

Domestic and Foreign Ownership Across All Insurance Lines

0%10%20%30%40%50%60%70%80%90%

100%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Foreign Paid-in Capital (%) Foreign Premium Volume (%) Domestic Paid-in Capital (%) Domestic Premium Volume (%)

Inflexion

Reversal


FOREIGN COMPETITION – NATIONAL INTEREST

Country Capital (TL m)Average

Dominant Share

Average Foreign Share

Premiums (TL m) Market Share

Austria 97.0 84.3% 84.3% 253.8 2.1%

BAE 40.0 53.0% 100.0% 0.3 0.0%

Belgium 51.1 100.0% 100.0% 23.7 0.2%

Bulgaria 1.0 86.8% 90.8% 0.0 0.0%

Dubai 65.0 98.5% 98.5% 75.8 0.6%

England 89.7 99.3% 99.3% 278.6 2.3%

France 476.0 84.3% 92.8% 1,923.9 15.7%

Germany 346.0 91.0% 97.4% 1,129.3 9.2%

Holland 145.3 93.3% 94.7% 550.2 4.5%

Israel 28.7 95.8% 96.1% 4.2 0.0%

Spain 350.0 90.0% 81.0% 361.2 2.9%

Turkey 230.0 43.7% 28.6% 1,335.1 10.9%

USA 226.5 75.5% 99.5% 220.8 1.8%

Total 2,146.4 84.3% 89.5% 6,156.8 50.1%

Companies Owned or Shared by Foreigners by Country

• The French have always have an interest in Turkey, this is illustrated by a ~16% market share

• Germany follow with a 9.2% stake

• England is largely represented by Aviva

• Entrants favour majority stakes but yield ownership to obtain better partnerships


CAPITAL OVERVIEW

-5%

0%

5%

10%

15%

20%

25%

30%

0

1,000

2,000

3,000

4,000

5,000

6,000

2006 2007 2008 2009

Reinsurance Co.

Life and PensionCo.

Non Life Co.

Non Life Co.Growth %

Life and PensionCo. Growth %

Reinsurance Co.Growth %

0%

20%

40%

60%

80%

100%

120%

0%

20%

40%

60%

80%

100%

120%

2006 2007 2008 2009

Life and PensionCo.

Non Life Co.



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2006 2007 2008 2009

Domestic

Foreign

Foreign %

Domestic %

-10%-5%0%5%10%15%20%25%30%35%40%45%

0

2,000

4,000

6,000

8,000

10,000

12,000

2006 2007 2008 2009

Reinsurance Co.

Life and PensionCo.

Non Life Co.



Reinsurance Co.Growth %

Paid in Capital by Insurance Type

Shareholders Equity

Foreign Chare in Capital

Paid in Capital Split


TKL ‘000

TKL ‘000

TKL ‘000

CAPITAL – GROWTH OF PREMIUMS AND CAPITAL

• Capital coming in faster than premiums• Premium to Shareholders’ Equity ratio is 150% on average. Premium to Shareholders’

Equity ratio shows a declining trend as the growth in capital is much larger than the growth in total premium

• ROE fell to 3.6% in 20009 from 15.2% and ROA fell to 1.7% from 5.9%• As can be seen in the rebased chart below, growth in equity capital in insurance (Proxy for

policyholder surplus- GI is over 85% of premiums), capital is growing higher than premiums

Equity Capital and Premiums Rebased to 1980 (Base year 100)

0

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

Direct Premiums Equity Capital


Accelerated growth

TKL

DISTRIBUTION - CHANNEL OVERVIEW (1 OF 4)• Turkey’s distribution structure is one of the most unique in Europe, polarised with amongst the highest

levels of bancassurance and agents and the lowest of direct and brokers

• Private insurance agencies generates approximately 70% of total premium in non-life branches and this level has remained constant in the preceding few years, but has overall come down somewhat

• Banking agencies follow private agencies with a share of 13%. This has increased 19% from 11% in 2006 to 2008

• Peculiarly, given bancassurance is not very well developed in non-life and constituted less than 10% in all EU countries, the highest market share is held in Turkey, with Portugal, the UK, France, the Netherlands and Spain following

• The penetration of bancassurance is similar to that of Brazil, with Malaysia and Mexico having similarly high level

• Brokers distribute 11% of premiums and increased 19% over the same period from 9%

• The share of direct premium generated by insurance companies is approximately 6% and has fallen significantly (38%) from 9.7% in 2006 to 6% in 2009

Distribution by Channel

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data and Sigorta Tutum ve Davranış Araştırması, Nielsen 2008. Translated by author from Turkish

6%

70%

13%

11%

1%

Direct

Agencies

Banks

Brokers

Other

DISTRIBUTION – EU COMPARISON (2 OF 4)• In Europe, non-life policies are distributed through traditional intermediaries (Agents and brokers) apart

from Switzerland, the Netherlands, Croatia and Nordic countries where direct sales predominate• Agents held more than a 50% share in six countries (Italy, Poland, Portugal, Slovenia, Germany and

Turkey) and more than 30% in 11 of the 25 countries• Turkey has the second highest level of agents across Europe

• Italy has a greater level, this is similar in Spain, although the data is unavailable• The structure is similar to that of Germany and Portugal• The most notable deficiency is in direct sales where the EU average is 29% vs. Turkey’s 7%• Brokers remain of much less import than agents in the majority of European countries, though there are

expectations where they do dominate in countries such as Belgium, Ireland and the UK, where they accounted for more than 50% of non-life premiums

Non-Life Insurance Distribution Channels (2008)

0%10%20%30%40%50%60%70%80%90%

100%

Direct sales Agents Brokers Bancassurance Other


DISTRIBUTION – CONSIDERATIONS (3 OF 4)• Costs to distributors and reinsurers have remained largely constant

• Life insurance commissions however are seen to be out of control, with one anecdote stating life commissions to bank branches are at 50%

• Attempts to limit competition with a “no more than 20% above the average” limit resulted in a circular formula which the Undersecretariat has admitted to and is seeking to ameliorate

• A Roland Berger “Global Survey” found in traditional markets insurers focus on product (42%) but in emerging CEE sales channels are the main focus (60% vs. 29% in mature)

• This makes sense, as with low levels of penetration, the focus is more on getting people insured than the specifics of the contract as in more mature countries with limited differentiation

22%

59%

8%

0.2%2%

8% Bank Branch

Agents

Direct

Broker

Internet

Don't know- companyprovides

‘Where Insurance is Bought?’• Marketing and branding is hugely important at

present to establish market leading positions

• At present the market is highly fragmented, though there are leaders emerging, the battle has yet to be won

• Nielsen found 69% of people found brand reliability was the key element in buying insurance

• Nielsen research supports Sigortacılık Genel Müdürlüğü data, finding too that agents are the dominant sales channel, followed by the banks

• The internet and direct channels constitute only 10% of surveyed sales


DISTRIBUTION – DRIVERS OF CHANGE (4 OF 4)

• The current distribution structure with agents dominating (70% vs. ~30% for mature countries or 40% in Europe in general) is unlikely to remain and has already come down from ~80% in the past 5 years, a trend mirrored in India which also was agent dominated

• The drivers for this will be as follows:• As the market becomes more informed, complex products will be demanded, largely in the

commercial space, such as for block coverage which will particularly favour brokers• As is precedented in Europe (particularly on the continent), bancassurance will gain traction

amongst consumers, though this will likely favour life more, related mortgage products and household insurance may do well

• Diversification by insurers through a multichannel strategy that will erode agent and broker predominance

• Direct and internet will be longer term plays, though offerings have been launched in the past year or so

• Given the infantile nature of the market insurers will be treading lightly, as by being too aggressive they may undermine their existing efforts

• Agents may feel threatened and lose confidence in their current tie• Given many companies have seen large annual changes in both directions oft heir agent

network this is not something to be taken lightly• The assertion that agency dominance will diminish must be tempered as Italy, a mature

market has persisted with extraordinarily high levels of agent sales, therefore we cannot assume Turkey will change over time

INSURANCE EMPLOYEES• Insurance and individual pension sectors employed more than 60,000 people in 2009

• The 62 insurance companies employed 15,602 people

• There are 15,579 intermediaries in Turkey as of 2009 year end

• The number of brokers licenced is 72, of which 57 are non-life

• There are 908 real and 431 legal entities loss adjusters (And 1,154 agricultural loss adjusters)

• There are 36 actuaries working the Turkish Insurance market• Insurers are now legally obligated to employ actuaries in non-life

• Below are the preceding four years of insurance, agencies, brokers, loss adjusters and total employees

-15%

-10%

-5%

0%

5%

10%

15%

20%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2006 2007 2008 2009

# of Broker

# of Loss Adjuster

# of Insurance Agency

# of Personnal in Insurance Co

Personnal in Insurance CoGrowth %Insurance Agency Growth %

Loss Adjuster Growth %

Staff and Growth


INSURANCE EMPLOYEES

-4%-2%0%2%4%6%8%10%12%

12,00012,50013,00013,50014,00014,50015,00015,50016,00016,500

2006 2007 2008 2009# of Personnal in Insurance Co

# of Personnal in Insurance Co Growth %

-15%

-10%

-5%

0%

5%

10%

15%

13,000

13,500

14,000

14,500

15,000

15,500

16,000

16,500

2006 2007 2008 2009

# of Insurance Agency # of Insurance Agency Growth %

-8%-7%-6%-5%-4%-3%-2%-1%0%1%2%

870880890900910920930940950960970

2006 2007 2008 2009

# of Loss Adjuster # of Loss Adjuster Growth %

-4%-2%0%2%4%6%8%10%12%14%16%

0

10

20

30

40

50

60

70

80

2006 2007 2008 2009

# of Broker # of Broker Growth %

Agents (Note right axis)

Insurance Industry Staff

Brokers (Note right axis)

Loss Adjustors (Note right axis)


UNDERWRITING RATIOS GROWTH• Growth in EOR has been fairly low at 0.5% on average

• However this is misleading, exceptionally sized figures were removed• The average is in fact 10.0%, with the best 5 averaging (7.2)% (vs. uncleansed (7.0)%)

• LOR growth has been the biggest impact on underwriting ratios with an average annual increase of 3.2% across the industry, with some notable large losses amongst smaller companies

• Similarly without data cleansing the average is 5.0% with the best 5 averaging (2.4)% (vs. uncleansed (2.2)%)• COR average is therefore heavily impacted by LOR growth

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

LOR EOR COR LOR Average EOR Average COR Average

Average Growth in Underwriting Ratios (2006 – 2009)


LOR – PER COMPANY

20%

40%

60%

80%

100%

AXA Anadolu Allianz Groupama Yapi Kredi Ergo Aksigorta Gunes MapfreGenel

Eureko FIBA Aviva Ray

2005 2006 2007 2008 2009 Average Group Average

20%

40%

60%

80%

100%

Ankara Zurich Chartis HDI Birlik Isik Liberty Hur Generali DubaiGroup

SBN Coface


Group 2 – LOR Over 5 Years by Company

Group 1 – LOR Over 5 Years by Company

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: Group 2 LOR maxed out at 100% and Remainder removed for comparability

• Majority of Group 1 suffers an average LOR with some outliers in 2008/9 and Eureko, Fiba and Aviva outperforming

• Group 2 is far more disparate with some experiencing extreme losses and Chartis performing exceedingly well (given its focus, implying there are not necessarily advantages of branch diversification)

LOR – PER COMPANY AGGREGATED

Group 2 – Aggregated LOR Over 5 Years by Company

Group 1 – Aggregated LOR Over 5 Years by Company

0%

50%

100%

150%

200%

250%

0%50%

100%150%200%250%300%350%400%450%500%

2009

2008

2007

2006

2005

Average

Group Average

0%

50%

100%

150%

200%

250%

0%50%

100%150%200%250%300%350%400%450%500%


SBN Coface

2009

2008

2007

2006

2005

Average

Group Average

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: Remainder removed for comparability

• The charts below to show the aggregated LOR ratios over 5 years• The green average line above and below the blue group average line shows under and over performance

• Group 1 acts broadly in line with Group 2 again being more volatile

EOR – PER COMPANY

Group 2 – EOR Over 5 Years by Company

Group 1 – EOR Over 5 Years by Company

0%

20%

40%

60%

80%

100%




0%

20%

40%

60%

80%

100%


SBN Coface


Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: Group 2 LOR maxed out at 100%

• EORs are much more varied than LORs, and the better performing LOR companies do not have the lowest EORs (Higher costs in active underwriting selection?)

EOR – PER COMPANY AGGREGATED

Group 2 – Aggregated EOR Over 5 Years by Company

Group 1 – Aggregated EOR Over 5 Years by Company

0%

20%

40%

60%

80%

100%

0%

100%

200%

300%

400%

500%

2009

2008

2007

2006

2005

Average

Group Average

0%

20%

40%

60%

80%

100%

0%

100%

200%

300%

400%

500%


SBN Coface

2009

2008

2007

2006

2005

Average

Group Average


• Similar to LORs, Group 2 EOR is varied and Group 1 performance is generally homogenous

• Group 2 average EOR is far greater than group 1 implying advantages to scale

COR – PER COMPANY

Group 2 –COR Over 5 Years by Company

Group 1 – COR Over 5 Years by Company

80%

90%

100%

110%

120%

130%

140%

150%



2005 2006 2007 2008 2009 Average

80%90%

100%110%120%130%140%150%


SBN Coface

2005 2006 2007 2008 2009 Average

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: Group 2 LOR maxed out at 100%

• The charts below show the annual COR

• The grey average line over the top of the red box illustrates the vast majority of companies operate in excess of a 100% COR

COR – PER COMPANY AGGREGATED

Group 2 – Aggregated COR Over 5 Years by Company

Group 1 – Aggregated COR Over 5 Years by Company

0%

20%

40%

60%

80%

100%

120%

0%

100%

200%

300%

400%

500%

600%

2009

2008

2007

2006

2005

Average

0%

20%

40%

60%

80%

100%

120%

140%

0%

100%

200%

300%

400%

500%

600%

700%


SBN Coface

2009

2008

2007

2006

2005

Average

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: Remainder removed for comparability, Dubai is a new entrant

• Group 1 performs better than Group 2

COR – UNDERWRITING RESULT ANALYSIS

Group 2 – Yearly Underwriting Result

Group 1 – Yearly Underwriting Result

-40%

-30%

-20%

-10%

0%

10%

20%



2005 2006 2007 2008 2009 Average

-70%-60%-50%-40%-30%-20%-10%

0%10%20%


SBN Coface

2005 2006 2007 2008 2009 Average


• Performance is largely consistent viewed on an annual basis

COR – UNDERWRITING RESULT ANALYSIS AGGREGATED

Group 2 – Aggregated Underwriting Result

Group 1 – Aggregated Underwriting Result

-15%

-10%

-5%

0%

5%

10%

15%

-80%-60%-40%-20%

0%20%40%60%80%

2009

2008

2007

2006

2005

Average

-35%-30%-25%-20%-15%-10%-5%0%5%10%

-140%-120%-100%

-80%-60%-40%-20%

0%20%40%


SBN Coface

2009

2008

2007

2006

2005

Average


• Below we can see the aggregated underwriting results

OVERVIEW

• General insurers generate profit by paying out less in losses (LOR) and expenses (EOR) than they generate in premium revenue and investment income

• Revenue is generated up front from premiums through selling an insurance policy and providing coverage over the next ~12 months, depending on structure

• Other than premium revenue, insurers generate income through interest, dividends and capital gains on the float

• General Insurers should be analysed excluding investment operations for the following reasons:

• Whilst underwriting and investment divisions of an insurer should interact (For no other reason to avoid ALM) the functions operate independently

• Insurers mostly invest in highly rated, sovereign fixed income held to maturity• Investors focus on underwriting activities as they are investing in that ability not their

investment competence (with the exception of Berkshire Hathaway), furthermore they can (or believe to be the case) invest more efficiently themselves which is the same reason they like excess capital to be returned

• Real competitive advantage generally comes from excelling in COR related activities• This section will analyse the 3 components which make up underwriting result as will be

delineated on the proceeding page

COMPONENTS OF GI INCOME STATEMENT AND KEY RATIOS• This section will analyse underwriting result through inductive method reasoning focusing on 3

areas. In doing so we will be able to understand how to compete effectively1. Revenue (Premiums)2. Expenses (EOR)3. Losses (LOR)

• Investment return is however integral to insurance profitability, so shall be touched on in revenue

Component Source Key Ratio Calculation

Revenue Premium NA NA

Expenses

Losses and Loss Adjustment Expenses

Loss ratio (LOR)

Incurred loss and LAE

Net premiums earned

Underwriting expenses (Acquisition cost, overhead etc.)

Expense ratio (EOR)

Underwriting expenses

Net premiums earned (*)

Total Expenses Above Costs Combined operating ratio (COR)

LOR + EOR

Net premiums earned

Underwriting result COR Difference 1 - COR

Returns on float Investment income Investment income ratio (IIR)

Net investment income

Net premiums earned

Net income Operating ratio COR + IIR

˭

+˭

+

˭

+

˭

Components Of GI Income Statement And Key Ratios

1

2

3

(*) Alternatively one may used ‘net premiums written’ which is frequently the case

MANAGING REVENUE – OVERVIEW (1 OF 2)

• The key to underwriting is to successfully charge premiums commensurate with the risk being taken on, while remaining competitive in the market place

• This is obviously difficult with significant competition in Turkey at present, with likely focus being market share than profit

• It is dangerous to manage a business with a sole focus top line growth (market share)

• In the early phases of development, the focus of consumers is not so much on product manufacturing, per se

• Structuring product to maximise penetration and cash flow (for reinvestment in these capital constrained times) is important, however structuring expertise will be more important in the future

• In the pursuit of capturing the high growth in the industry it is pertinent to note that insurers are finding their feet in managing “adverse selection.” Insurers want to grow GWP but doing so runs the risk of accepting higher-risk clients

• Higher premiums to do not necessarily equate to higher profits irrespective of potentially of investment income from the float which in a low interest environment is ominous

• As insurance is fundamentally a commoditised product it is difficult to differentiate oneself from competition

• Financial strength rating is important to an extent, but only to a threshold (AA for casualty and A for property)

• However by doing so one may attract more premiums. Examples are:• Customer service: Chubb• Low cost provider/easy to deal with: GEICO

MANAGING REVENUE – OVERVIEW (2 OF 2)

• Pricing is the key manageable driver of revenue, but it is difficult to get right

• Insurers must price policies in advance of providing protection, with only an educated guess as to the actual loss and LAE components of costs until policies have expired, losses have been reported (short vs. long tail), and all claims have been paid

• Insurers underwriting practices centre on (and are discussed in this presentation):• Selection decision to optimise spread of risk of insured and avoid adverse selection

(Discussed in “Components of Losses – obstacles to managing Insurance exposure”);• Offering policy coverage terms and conditions attractive enough to lure customers, but

restrictive enough to facilitate sound actuarial analysis (Discussed in slide “Components of Losses – pricing characteristics”)

• Pricing coverage to be market competitive while generating revenue to cover losses and expenses and ideally earn a RoC over the hurdle rate

• It is evident that top line strategies impact each aspect of the business, but if price has not be squared off, perfect selection and lean operations will not be sufficient

MANAGING REVENUE - MARKETING P’S

• An interesting manner of analysing company margins (i.e. revenue) and market power is through applying the 4P’s of marketing

Trend Question AnalysisProduct • Does it fit with market positioning and market

segmentation?• Is it tangibly differentiated?• Are market trends in the right direction?

• Low cost vs. full service. Being ‘Stuck in the middle’ is never positive regardless of industry and the consultant

• What is important to customers at this phase of Turkey’s development?

• Capital allocation to branches and countries? • Do you want to win in Turkey?

Placement • Do brokers/agents/banks favour the product?• Are prospects properly identified and served?• How are you securing shelf space?

• Competition for shelf space is fierce- what can you do to get it and at the right margin?

• Being a part of the market leader is a highly attractive selling point. Success breeds success

• Find the gaps in the market

Promotion • Is the target customer aware of the product?• Is there any reward for loyalty?

• With so many competing brands, being the one people remember is key. Despitecomparison sites this is still an imperfect market

Price • What is the pricing strategy? • Market capture or underwriting result?• Is there perceived value in the brand?

• Insurers are going for market share, but should you be playing the long game to avoid being consolidated rather than the one consolidating?

MANAGING REVENUE - PRICING ABILITY

• Fundamentally the issue with market profitability for insurers is the lack of pricing ability

• To some extent pricing is restricted, but with the introduction of free tariffs in TPL vehicles in 2007, insurers have, at least some structural pricing flexibility

• Opportunity to segment within insurance types, pricing products according to defined criteria• Fragmented market

• Combined shares of the top 10 companies in land vehicles branch is 79% all competing to gain market share

• Barriers to entry low and prize is large• In the 2006-2008 period 13 foreign companies entered the Turkish insurance market• Looking ahead for 2010, incumbents estimate that these entries into the Turkish market will

continue• Total non life companies increased from 32 to 37 from 2006-2009 with foreign insurers

increasing from 14 to 24 over the same period implying significant acquisitions• Growth in premiums but not in profit

• For the past 2 years, premiums have been less than inflation, with GWP contracting• However in 2009 volume rose by 14.5% implying rates and thus profits have contracted• Paid (64 to 69%) and incurred (55 to 61%) losses have been increasing over past 5 years• Paid to incurred losses have moved between 86 and 94%, likely due recently to more

conservative reserving practices• These have not increased beyond 100% en masse

MANAGING REVENUE - ISSUE IS LOW TARIFFS• Fundamental issue of why there are so few cases of underwriting results in Turkey is that

prices are too low and companies are paying the price

• When technical results is analysed, structurally there are improvements• The retention ratio has gone up• There has not been any substantial difference in the rate of agency commission • Commission from reinsurance activities has been decreasing too• The premium growth rate has decreased and the loss and expense ratios have been

increasing

2007 2008 2009

Premium Growth Rate 15.39% 6.30% 3.91%

Premium Retention Rate (*) 70.12% 74.59% 75.49%

Claims Payment Ratio 66.04% 60.63% 61.12%

Reinsurance Commission Rate 19.83% 18.34% 16.59%

Intermediary Comm. Rate 15.35% 14.56% 15.52%

Loss / Premium Ratio (**) 64.93% 75.30% 79.87%

Expenses / Premium Ratio 21.98% 16.50% 23.77%

(Loss + Expenses)/Premium R.(**) 86.92% 91.80% 103.63%

Technical Profitability Ratio 2.58% 4.38% 1.16%

Technical Ratio (NB: See note)

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 dataNB Note: There figures are taken directly from government statistics. Analysis indicates that they are slightly wrong. They are presented as is for the purpose of comparability (One error will work its way through so to speak).(*) Calculated as considering for only proportional treaties. (**)Calculated for life companies as life branch excluded

MANAGING REVENUE – THE LONG GAME• In order to maintain margins, premium growth must keep up with claim cost inflation

• The insurance industry has not generally been good at this• In order to keep up with the rate of inflation at minimum, premiums should grow at the same rate of

nominal GDP (Proxy gauge for growth of insured values base)• In reality, premiums should grow faster as inflation segments insurers are exposed to tend to outpace

overall inflation rate. Where this does not happen price per unit of risk falls• Economics posits if overall growth is less than unit demand growth, then price is falling

• Turkey, because of its growth, has empirically performed better than markets such as the US in this respect, with premium growth being lower than GDP 15% vs. 55% in the US

• The chart below shows the spread between premium and GDP growth• In mature markets ,if industry demand grows at 3-5% and capacity grows at 6% then the industry is

inevitably in a constant state of supply/demand imbalance making it hard for premium growth to keep up with claims growth

• Given heightened competition of late it would be a fair assumption that the ability for insurers to overcome claims growth in the future will be diminished (See the trend line)

Premium Spread to GDP – Below GDP Growth in Soft Cycles

Source: International Monetary Fund, World Economic Outlook Database, April 2010, TSRB and Sigortacılık Genel MüdürlüğüNote: Spread forecasts from 2010 to 2015 have been derived from IMF forecasts through linear regression

-20%

-10%

0%

10%

20%

30%

40%

50%

Spread Linear (Spread)

AGGREGATED EARNED PREMIUMS (NET) – GROUP 1

0

200

400

600

800

1,000

1,200

0

1,000

2,000

3,000

4,000

5,000

6,000

2005 2006 2007 2008 2009 Average

Ray

Aviva

FIBA

Eureko

Mapfre Genel

Gunes

Aksigorta

Ergo

Yapi Kredi

Groupama

Allianz

Anadolu

AXA

Average

Top 5 Ave

Top 10 Ave

Top 25 Ave

Group 1 - Net Earned Premiums by Company

• The top 5 companies dominate the market

• AXA is giving Anadolu a run for their money despite being the long term dominant incumbent


TKL ‘m TKL ‘m

AGGREGATED EARNED PREMIUMS (NET) – GROUP 2

0

100

200

300

400

500

600

700

800

0

100

200

300

400

500

600

700

800

2005 2006 2007 2008 2009 Average

Remainder

Coface

SBN

Dubai Group

Generali

Hur

Liberty

Isik

Birlik

HDI

Chartis

Zurich

Ankara

Average

Top 5 Ave

Top 10 Ave

Top 25 Ave

Group 2 - Net Earned Premiums by Company

• The Top 5/10/25 lines illustrate how scale in premiums rapidly trails off and companies become equally sized


TKL ‘m TKL ‘m

ANNUAL EARNED PREMIUMS (NET) BY COMPANY

0100200300400500600700800900

1,000

2005

2006

2007

2008

2009

Average

0100200300400500600700800900

1,000

2005

2006

2007

2008

2009

Group 2 – Annual Net Earned Premium Per Company

Group 1 – Annual Net Earned Premium Per Company


TKL ‘m

TKL ‘m

COMPANIES THAT HAVE MADE AN UNDERWRITING RESULT

Aggregated Result Profits (And losses)

Company / Year Spread of Underwriting Results (And losses)

-25%-20%-15%-10%

-5%0%5%

10%15%20%

Eureko FIBA MapfreGenel

Chartis DubaiGroup

Aviva Gunes Yapi Kredi Hur Birlik Allianz Ergo

2005 2006 2007 2008 2009 Average

-8%-6%-4%-2%0%2%4%6%8%10%12%

-40%-30%-20%-10%

0%10%20%30%40%50%60%

Eureko FIBA MapfreGenel

Chartis DubaiGroup

Aviva Gunes YapiKredi

Hur Birlik Allianz Ergo

2009

2008

2007

2006

2005

Average


• The most profitable companies are Eureko, Fiba, Mapfre Genel and Chartis

• 7 others have made profit, but only Aviva has done so twice

• Dubai is neutral but as a new entrant should be ignored

ANALYSIS OF BEST UNDERWRITERS BY BRANCH

• Eureko, Fiba, Mapfre Genel and Chartis are the most successful underwriters in the Turkish market

• Aviva and Yapi Kredi have had more success than the remainder of competitors

• Interestingly, AXA and Anadolu the major forces in the market, have not made an underwriting result in the last 5 years

• Whilst there may be benefits of scale for attracting premiums, and in theory benefits of the law of large numbers/pooling, it evidently does not correlate to underwriting result and managing adverse selection

• Most successful companies are underweight in vehicle segments other than specialist ones and are strong in accident and general liability

% Allocation of Business per Branch


Acc.Air

Veh.Air

Liab. Cred.Fin. Loss

Fire / Nat. Dis.

Gen. Dam.

Gen. Liab. Health

Land Veh.

Land Veh. Liab.

Legal Prot. Other

Sea Veh. Trans.

Mapfre Genel 2.71 0.19 0.07 na 0.56 18.88 11.56 2.63 8.85 28.76 21.67 na na na 4.12

Eureko 12.84 3.57 0.04 0.17 0.76 23.26 18.11 4.57 5.12 19.54 7.48 0.12 na 1.22 3.20

FIBA 3.00 0.27 na 1.09 0.29 18.37 14.62 0.80 1.91 27.02 28.54 0.71 0.13 0.94 2.29Chartis 32.02 na 0.18 na 7.92 14.36 2.55 17.49 3.43 3.11 1.13 na 6.56 0.00 11.25Company average 12.64 1.34 0.09 0.63 2.38 18.72 11.71 6.37 4.83 19.61 14.71 0.42 3.35 0.72 5.22

Market Average 5.45 0.65 0.58 12.72 0.89 18.50 8.46 2.61 7.03 25.90 26.84 0.41 0.65 0.70 2.60Multiple of MA 2.32 x 2.05 x 0.16 x 0.05 x 2.68 x 1.01 x 1.38 x 2.44 x 0.69 x 0.76 x 0.55 x 1.02 x 5.17 x 1.03 x 2.01 x

Mapfre Genel 0.50 x 0.29 x 0.12 x na 0.63 x 1.02 x 1.37 x 1.01 x 1.26 x 1.11 x 0.81 x na na na 1.59 x

Eureko 2.36 x 5.45 x 0.06 x 0.01 x 0.85 x 1.26 x 2.14 x 1.75 x 0.73 x 0.75 x 0.28 x 0.29 x na 1.75 x 1.23 x

FIBA 0.55 x 0.42 x na 0.09 x 0.33 x 0.99 x 1.73 x 0.31 x 0.27 x 1.04 x 1.06 x 1.74 x 0.21 x 1.34 x 0.88 x

Chartis 5.88 x na 0.31 x na 8.93 x 0.78 x 0.30 x 6.69 x 0.49 x 0.12 x 0.04 x na 10.14 x 0.00 x 4.33 x

Company average 2.32 x 2.05 x 0.16 x 0.05 x 2.68 x 1.01 x 1.38 x 2.44 x 0.69 x 0.76 x 0.55 x 1.02 x 5.17 x 1.03 x 2.01 x

INVESTMENT RETURN – GROUP 1• This paper has purposefully detracted from investment return on float toward underwriting performance,

but to do so entirely would only tell part of an insurer’s story• Financial performance, namely profit must include investment performance in its evaluation

• This is viewed by dividing net investment return (Post investment expense) earned on the investment portfolio by the premiums earned, thereby illustrating investment efficiency and consequently, success

• Deducting this from the combined ratio gives the insures underlying operating ratio – the standard measure for assessing overall financial performance

• Investment income provides invaluable buffer to cover losses and expenses and similarly, taken together, a ratio less than 100 indicates underlying profitability

• As can be seen below the larger companies generate larger investment returns in nominal terms, but this is simply a function of creating profit from a larger asset base

• To see returns on a relative basis, performance % should be looked at• Having said that the largest 4 companies have outperformed their peers, though it is not statistically

meaningful given small players such as Isik and Eureko have faired well too

Group 1 – 5-Year Annual Investment Return and Performance

0%

2%

4%

6%

8%

10%

12%

14%

16%

020,00040,00060,00080,000

100,000120,000140,000160,000180,000

2005 2006 2007 2008 2009 Average Investment PerformanceSource: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

TKL '000

INVESTMENT RETURN – GROUP 2

• Average investment return, excluding SBN and remainder outliers, has been 8.8% over the preceding five years and almost identical for the two groups, implying little economies of scale in investment capabilities

• Investment profits have somewhat conspicuously faired well over the past five years, steadily increasing, during an epoch which featured considerable economic turbulence

• This may partly be a function of the asset base growing• Companies which have not shown investment performance in asset management, such as

Generali, logically show consequent underperformance in profits

Group 2 – 5-Year Annual Investment Return and Performance

-5%

0%

5%

10%

15%

20%

25%

-5,000

0

5,000

10,000

15,000

20,000

25,000


SBN Coface Remain Average

2005 2006 2007 2008 2009 Average Average Investment Performance (2nd axis)

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: High returns are due to Other Technical Income being included which for smaller companies can create anomalies. Second axis scale has been brought down for visibility purposes. SBN figures has due to Ticaret Sigorta inclusion which had Other Income approximately the same size as investment income by way of example

TKL '000

UNDERWRITING PROFIT/LOSS COMPOSITION – GROUP 1

• The chart below illustrates the composition of 5-year average underwriting result. underwriting profit and investment return

• Investment return transfer from non-tech account and other technical income (Net)• As discussed, few companies generate underwriting result, but as can be seen, almost

every company generates underwriting profit which is sustained through investment returns

Group 1 - Composition of Average 5-year Underwriting Profit/Loss

-50,000

-25,000

0

25,000

50,000

75,000

100,000

125,000

Underwriting Result Underwriting Profit Investment Return


TKL '000

UNDERWRITING PROFIT/LOSS COMPOSITION– GROUP 2

• Investment return amongst the smaller companies has averaged 15% against 9%

• Despite this, both underwriting profit and result are more pronounced

• The smaller companies are invariably new entrants such as Coface and Dubai Group

Group 2 - Composition of Average 5-year Underwriting Profit/Loss

-25,000

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

15,000



Underwriting Result Underwriting Profit Investment Return


TKL '000

UNDERWRITING PROFIT – GROUP 1

• The chart below illustrates annual underwriting profit for the preceding five years

• Companies that generate profit or losses consistently do so

• 2006 and 2009 were the worst years for underwriting profit

Group 1 – 5-Year Annual Underwriting Profit

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000



2005 2006 2007 2008 2009 Average


TKL '000

UNDERWRITING PROFIT – GROUP 2

• Group 2 have consistently made smaller profits than the larger companies in the market

• Liberty and Ankara have made particularly large annual losses, as did Dubai in its first year

Group 2 – 5-Year Annual Underwriting Profit

-60,000

-50,000

-40,000

-30,000

-20,000

-10,000

0

10,000

20,000



2005 2006 2007 2008 2009 Average


TKL '000

COMPONENTS OF EXPENSES

• Similar to any business, operating efficiency is important, but in general insurance there are some differences

• Operating efficiency is calculated by dividing operating expenses excluding losses and related expenses into total premiums, such that the cost of underwriting operations relate to the premium revenue generated from those operations

• The components are as follows:• Policy/customer acquisition costs• General and administration costs

• Policy acquisitions costs are relatively large for a general insurer (Though smaller in a sense to life business). Costs paid to distributors under an indirect sales model, particularly in a growing and competitive environment can cut deep into profits. Whilst high incentives may need to be initially offered to capture networks to gain market penetration, they are inherently unsustainable

• Insurers therefore need to understand what is important to their network of bancassurers, agents and brokers and focus on the areas such as brand or education and the like, that are valued and can come at a lower cost

• General and admin costs are the same to any business and managers need to be aware of the usual productivity and related cost metrics

• As mentioned, this can be done in two ways, from statutory accounts, net premiums written is the denominator and under financial accounts such as IFRS or GAAP, net premiums earned are used (Solvency vs. going concern conventions)

MANAGING EOR• The huge spend being put into branding at present will likely collapse in approximately 5 years

time, shifting to a sales orientation (See value chain slide)• Short term focus is on brand establishment and this is an unavoidable capital investment

• There is generally limited opportunity to outsource non-core aspects of the value chain given insurers’ strategic goals, composite structure and importance of marketing and sales at present

• Sales is effectively outsourced given the distribution structure of the market (franchise)• Potential economies of scale could be garnered through offering admin/backoffice outsourcing to

domestic and even foreign insurers should the capability be present already• Marketing and branding is key• Claims management as a typical core back office activity is difficult to outsource• Underwriting and risk management is central to an insurer (which makes differentiation possible)

and directly linked to LOR

20%

30%

40%

50%

60%

70%

80%

Average Linear (Average)


5-Year Average EOR

MANAGING EOR – BRAND INVESTMENT WARRANTED• Nielsen research provided interesting insight into the motivation to purchase insurance

• Brand reliability is overwhelmingly key• Providing sound product structuring and payment terms are more important than variety• Additionally, expense of educating and providing information resources to the distribution network,

particularly agents is a worthwhile expense• Insurers are evidently doing a decent job at customer servicing, as surprisingly, 81% are extremely happy

with insurers and only 2% decidedly unhappy• Those unhappy with insurers are due to reimbursements not meeting expectation and officials being ignorant

or uninterested in the customer (poor service), ether at the insurers or from an agent• 56% of complaints pertain to auto insurance ( which given prevalence is expected)• Of cancelled insurance contracts, majority pertained to private pension, life and health insurance, with most

doing so due to financial situation, rather than increased premium payments and dissatisfaction with agents (the two next top reasons)

• To buy insurance again, most need their financial situation to improve (49%), premiums to be improved or more attention to complaints to be given. 26% wont take up insurance again

Elements of Brand


0% 10% 20% 30% 40% 50% 60% 70%

Variety Of Products OfferedContent Of The Bond

Appropiate Payment TermsAdvised Of The Company

Prevalence Of AgentsRecognition Of The Agents

Advice ProvidedDon't Know/Someone Else Organised

Variety Of Products OfferedReceived A Visit

Received Special PromotionOther Than

COMPONENTS OF LOSSES

• Fundamental to an insurers underwriting operations is how much they are paying out in claims and LAE for euro taken in

• This is best analysed by dividing total losses into premiums earned (LOR, which throughout this presentation is calculated on a calendar-year loss basis)

• There are two main components of losses

• Incurred losses• Indicate insurers risk selection and pricing ability; this is the bread and butter of insurance• To be able to write business effectively there are a number of characteristics which are

integral, and two obstacles to be avoided which are discussed in the proceeding pages• Effective pricing implies insurers are able to write profitable business, but in Turkey there

are constraints on free pricing• Loss Adjustment Expenses

• Indicates claims-handling efficiency. Invariably, insurers with low EORs will also be effective in keeping down LAE. LAE is exogenous to the factors in managing losses, per se

• Claims handling is a key factor in client servicing and in Turkey, insurers are legally bound to pay out claims without delay (Art 32.3)

• It is important to note that across insurers, different levels of premiums are underwritten across different branches; the branches have inherently different short and long tail characteristics

• Writers of general household insurance (Range 40-60% generally) should, ceteris paribus, have lower LOR than long tailed writers such as health insurance (Range of 60-110%) given their lower reliance on investment income – longer tail businesses have more time to generate investment income

LOSSES – IDEAL CONDITIONS FOR MANAGING INSURANCE EXPOSURE• For insurers to have the possibility of writing profitable business the following five factors to

varying degrees are required

Characteristic AnalysisLarge number of similar exposure units

• Simple matter of scale, thereby benefitting from the principles of pooling and the law of large numbers

• Particularly applicable in branches such as vehicle that are less prone to catastrophic (specific) loss and where millions of similar independent exposures are insured. They have more stable loss ratios than lines with fewer exposures

Accidental • Insurers are at a disadvantage if the insured in some way controls whether the loss occurs• To mitigate the likelihood of this, insurers must be vigilant in policy terms and ensure loss

adjustors are thorough/sufficient staff employed and potentially could instigate stricter policies of more suspicious claims that may consequently make more use of the IAS but would be balanced with faster claims payment to enhance the brand (“easy to deal with”)

Definite and measurable

• Avoid more specialist branches and write standard policies• By operating in branches with characteristic 1, insurers are able to accumulate experience

in the area of measurement. Furthermore, one can be more restrictive in the types of policies written. Where there is appetite for more specialist policies (e.g. satellite launches) cession can be effectively applied

Not catastrophic • Losses are hard to manage when multiple insureds are exposed to a single peril or event such as earthquakes. It is difficult to apply either pooling or law of large numbers to calculate appropriate rates since all homes in the landfall zone are exposed to loss

• Elements of this risk are identified and removed from standard contracts in the case of earthquakes in Turkey through the TCIP related legislation

Economically feasible to ensure

• Common sense dictates that underwriting should ensure that the price per unit of risk will generate a sufficient ROC and undue risk is not being taken on (e.g. writing CDS on CMOs etc.)

Source: Characteristics from ‘Property and liability insurance principles – 2nd edition, Smith Treishman, Wiening, Johnson

LOSSES – OBSTACLES TO MANAGING INSURANCE EXPOSURE• Even when the preceding ideal conditions are adhered to and managed, insurers must

overcome two obstacles in order to build a profitable book of business: adverse selection and moral hazard

• This is necessarily difficult to control

Characteristic Analysis

Adverse Selection • People who have the greatest probability of loss are logically the ones most likely to seek insurance from insurers. insurers are most at risk of being adversely selected against when attempting to gain share by lowering price

• At present, competition is fiercely high and prices, as a matter of course, are coming down

• Insureds who are poor risks are in all likelihood, more able to purchase insurance at attractive rates and terms though they have greater probabilities of loss than others

• Given low penetration of insurance, this issue not yet a large one• Chasing top line growth rather than the bottom line is a mind-set that needs to take

hold and have underwriting processes adhered to. There is a precarious balance of priorities

Moral Hazard • Dishonest tendencies in the character of the insured increase the probability of loss occurring

• It is difficult to identify and assert dishonourable tendencies in groups en mass. • What can be done to mitigate this however, is tiered pricing, but as we have

discussed pricing is not yet free• There is little evidence that fraud is overtly high In Turkey as outlined in the

proceeding page

Source: Characteristics from ‘Property and liability insurance principles – 2nd edition, Smith Treishman, Wiening, Johnson

LOSSES – MORAL HAZARD (FRAUD)?• There is not much evidence that fraud is high, or at least is being detected

• In 2009 there were 561 complaints referred to the relatively new IAC – a fraction of the number of policies underwritten

• Under Insurance Law 5684, in order to settle the disputes arising between the policy holder beneficiary of an insurance contract and the insurer, an Insurance Arbitration Commission (IAC) was formed within the Association whereto complaints are directed

• Breaking these down• 55% of non payment complaints go to arbitration• Complaints are mainly general in nature: 74% relate to auto insurance and 10% to fire• The vast majority are small, less than TKL 5,000

• This is not a perfect indicator of fraud, but merely a useful proxy given available information

No.of Apply Settled by Rapporteur

Referred to Arbitrator Other (*)

Refusal to pay 476 49 261 166

Complaint as to inadequate payment offer by insurer 85 12 52 21

Total 561 61 313 187

Instances of Arbitration

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. (*) Rejected because of not completing the procedure, withdrawn by insured or in searching step

LOSSES – TIERED PRICING (1 OF 2)

• Tiered pricing is similar to the economic concept of price discrimination (All three degrees) and similarly involves market segmentation, though the principal motivation is risk categorised pricing, though the tariffs will as a matter of course be discriminatory to some extent

• In this context, tiered pricing entails putting applicants into defined boxes from which a risk-priced, market competitive tariff will be charged

• The manner by which the boxes are defined and prices levied is key• Computing technology has facilitated the possibilities for refined segmented pricing methodology

• Progressive, as the pioneer, reaped super-normal growth and profit (From 1994 to 2003, Progressive’s revenues grew at a 17% CAGR and its COR averaged 93.7%) when its tiered model was still a competitive advantage as it was more able to price risk (**)

• But as a policy pricing tool that segments customers and prices policies offered based on statistically reliable quantitative characteristics, it is only as good as the data at its disposal

• There are a number of cases where contentious data points have been used to tier insured• Education/Occupation – GEICO criticised• Credit rating – Generally attacked by consumer advocacy groups

(*) Moneyball is about baseball analysts who deconstructed the game, viewed it quantitatively, and then put it back together in a better way(**) In baseball, the Oakland A’s Billy Beane analysed statistics and figures that others ignored, found value in “cheap” players who were overlooked by others, and produced a superior won-lost record on a shoestring budget. The A’s won-lost record is not the result of chance. It’s the result of a strategy that takes advantage of data and statisticsSource: McKinsey and InsurQuote, 2004, Presentation to Auto insurance Report National Conference

“In professional baseball it still matters less how much money you have than how well you spend it.”- Moneyball, Michael Lewis (*)

LOSSES – TIERED PRICING (2 OF 2)

• Insurers should determine which factors in Turkey are most predictive when determining risk profile

• Research found that for a sample risk, Nationwide generated one price, while Progressive—the company with the most sophisticated pricing—generated 131 different price points

• Progressive’s multiple prices were the result of a more expansive list of questions asked at the time of application and a more aggressive analysis of the relationships between rating characteristics

• The greater the granularity of the underpinning data, the more tiered the pricing can be, ergo, insurers are able to compete more favourably, assured that the price per risk is underpinned by empirical analysis

• Aid positive brand building through avoiding mis-priced business; overcharging good risks and under-pricing bad ones

• Research showed Progressive did not deviate meaningfully from the market average, while less successful companies frequently went above or below

• Progressive’s higher profits are likely driven in part by less sophisticated competitors tending to make mistakes when reducing prices in an effort to chase growth or maintain market share

• They pay the price later through higher claim costs• In non-standard auto, prices were below industry average, but more dispersed than competitors

indicating ability to identify risk and segment customers• In sum, effectively tiering applicants within legal constraints leads to higher profitability and

long term growth in Turkey

Source: McKinsey and InsurQuote, 2004, Presentation to Auto insurance Report National Conference

LOSSES – PRICING CHARACTERISTICS (1 OF 2)

Note Action

Gra

nula

rity

• Granularity is the number of pricing “cells” an insurer generates based on the data it gathers to underwrite a risk

• Age, would be four cells if drivers are placed in broad ranges such as 16-25, 26-40, 41-60, and 61 and up. But age would be seventy cells if each year from 16 to 85 is considered individually, assuming it can be calculated that each year has a distinct risk characteristic

• If the correlation between age and credit is such that credit is more important for middle-aged drivers than young or old drivers, that would result in more cells than if credit is given the same weight for all age groups

• Greater granularity increases a company’s ability to adjust and adapt pricing as it learns more about the relative importance of variables and their relationships to each other

• The existence of a large number of cells does not conclude to sophisticated pricing but rather indicates the potential effectiveness of a pricing model

• Enhance the granularity of data

New

var

iabl

es

• To lead price sophistication, insurers cannot merely identify new interactions among established rating factors, it must also identify new variables

• Education and occupation are examples of leading edge

• By making sense of data new correlations can be found such as whether repair costs are greater than theft replacement costs, or if applicants ask for increased bodily injury limits above the standard ( “physical damage symbols”) implies they have a higher propensity for risk taking behaviour and should be priced accordingly

• Corporate culture is essential to make this effective; encourage assumptions to be tested and new ideas to be introduced and actually executed

• Reward innovation for both success and “smart failures”

• InsurQuote and McKinsey research identified four key pricing characteristics to successful underwriting: granularity, dispersion, interactions, and variables

LOSSES – PRICING CHARACTERISTICS (2 OF 2)Note Action

Inte

ract

ion

amon

g va

riabl

es

• Each variable has a certain importance. The interaction of variables, creates an exponential increase in granularity

• Age, credit scores, and territory become more important when taken together. It pertains to making sense out of the data, the relative risk of one insured vs. another

• For example, Land Rovers being farm vehicles rurally and status symbols in Chelsea, and more likely to be stolen there than in the suburbs

• This is more about human cognition than computer power

• Encourage staff to make sense of what they are presented

Dis

pers

ion

• Dispersion is the range of premium that an insurance company generates from its cells. A company may have high granularity, but if its dispersion is low, it isn’t bringing more accurate prices to the marketplace.

• E.g. Company with low dispersion range: €400 to €600. More analytically sophisticated company has range of €250-to- €750 for the same risks

• Price sophisticated companies are constantly changing as they learn from mistakes and identify hypothesis’ to test. The least sophisticated companies are static and fail to respond to the market and competitors

• Also, less sophisticated insurance companies retain more under-priced customers and so their loss ratio rises

• A company may have high granularity, but if dispersion is low accurate prices aren’t reflected in the marketplace

• Insurers should establish prices that are high enough to encourage the highest-risk drivers to move (or stay with a competitor), thereby punishing competitors that lack the pricing sophistication

• Do not rely too much on pricing model and continually test new assumptions

LOSSES - MANAGING LOR

• Underwriting is the heart of insurance core competence, sine qua non to insurance in Turkey

• While the importance of distribution, brand, expenses, claims handling, and distribution network/relationships shouldn’t be minimized, there‘s no substitute for having the most accurate price for a risk, or class of risk, particularly if it is market competitive

• Underwriting and pricing decisions must be made in light of the structures of the varying branches, bearing in mind competition, but not doing so where the price per risk is unacceptably high for the perceived advantages of market share

• A principle generally asserted here to manage LOR is to stick close to the shore and avoid difficult risks (Which would not meet the ideal criteria mentioned previously)

• However, there are many companies that specialise in in writing difficult risks and they receive higher premiums for underwriting them accordingly

• Note, the experience to enable them to do so has been garnered over a number of years. • Insurers could conceivably position themselves to be a specialist writer in such business in

a few years time should it endeavour to garner the requisite knowledge• Progressive had highest growth rates In non-standard auto

• If insurers are to compete on price, then to do so profitably they must have a competitive advantage in tiered pricing

MANAGING COR

• The Combined Operating Ratio or COR is simply the sum of the losses and expenses incurred • It brings together a measure of an insurer’s underwriting COGS efficiency and operational

efficiency to provide a gauge of overall underwriting performance- under 100% implying results• Ergo, as a function of LOR and EOR, insurers are faced with a number of balancing questions:

• Is it better to write a policy for a preferred-risk driver for a €500 premium, or a high-risk driver for €2,000?

• Should insurers spend more to reduce its loss ratio or less to reduce its expense ratio?• What mix of insured and branches is most profitable and worth insurers allocating capital to?• Will a high commission (and excess of competitions already ‘high’ commissions) induce an

agent, broker or bank to “produce” more profitable business, or could insurers bypass them, try establish a direct line and offer a lower premium with the money that’s been saved on EOR?

• Each of these questions lends itself to quantitative analysis

• A leading, or at least market EOR is eminently achievable and there are consultants who can help businesses achieve this. Naturally each business will have its own set of issues. Be they legacy ones of bringing an acquiree up to international best practice, or due to an ill structured indirect sales structure

• The leaders in the market will be those who are able to hold their LOR down and in turn generate larger underwriting results, being the principal negative on the way to the bottom line

• A combination of factors are required, and not just systems and software• Fundamentally a culture of success which will challenge norms and pursue better way of doing

things and pricing risk, with management that is supportive and rewarding• To conclude, leading businesses will run a tight ship and lead the market in its underwriting

practices. Top line growth will be managed over the long term

OVERVIEW (1 OF 2)• As we have seen, underwriting result is attained by managing top line growth, operating the

business effectively (minimising EOR) and instigating accurate and competitive pricing and selection techniques

• That is indeed easier said than done, and insurers, en masse, not having generated much underwriting result and employing many staff more erudite than the author are testament to that fact

• Incumbents therefore need to undergo a process of reflection and ask question of themselves

• The aforementioned are a series of random thoughts to commence the process:

• Distribution• Looking at the early attempts of Apple (A very different industry) to grow in Japan where they initially

went with a local partner with no existing consumer-tech business - are you selling through the right people and is your existing partner the right one?

• Given the competition for distribution channels, are you targeting the right ones and are there new ones to attract more and attractive applicants? :

• The opportunity to be the leader under the direct model or innovate new channels such as promoting housing related insurance through, say estate agents?

• Can you do things better and different than has been done before? Little things can make a big difference, so can you create differentiation – services, such as user tools that have mass attraction?

• Create invaluable tools insured would use daily/weekly to induce barriers to switching, so even if competitor cheaper, you don’t want to live without the tools. Integrate technology with other financial groups such as banks for must need services

• iPhone app for renewing insurance AND checking you bank balance• Partner with Mint (online service) for Turkish market?

• American Airlines created competitive advantage through an agent ticketing system called SABRE• What is a killer app for agents given dominance of agents in Turkey?

• Network effect: do certain lines market better and drive ancillary purchase in ‘core’ products?• Go about achieving success in a different way

OVERVIEW (2 OF 2)• Product

• How can products in each branch be structured with ancillary benefits to create differentiation given in this stage of the market vanilla products are in demand?

• Greater allowance for transfer of developed benefits from an insurer to reduce switching costs• Given the market is relatively unsophisticated, could a large education spend, partnered with the

Undersecretariat, concurrently with a complex product offering position the company as market leader of terms of knowledge?

• Brand• What are options for brand differentiation, and can value be made segregating the market,

dividing brand into ‘premium’ and ‘value’?• Differentiate service. ‘Platinum card’ package – create prestige

EOR

• EOR is simply the costs of operating the business. Every Euro paid in underwriting expense is a Euro that doesn't flow to the insurer's bottom line

• Success therefore amounts to leveraging scale economies• To attract customers, insurers have to advertise: what is the most cost efficient means of doing so?.

High brand equity imbues a leverage factor• Paid commissions to distribution channels; banks, agents and brokers: Does head on competition on

price pay in the long and short term, or are there other drivers? • GEICO has achieved long-term success by cutting out the middle-man as Dell did, but will this negatively

affect existing relationships?• Pay employees a salary: what and how many staff are required for any given level of contracts?

• Are you flexible to scale up and down to market changes and are staff delivering?• Pay taxes and other operational expenses: is the business structured correctly?

• Understanding the answers to these questions comes from experience and increased trade, by insourcing (offering outsourcing) there is potential to gain:

• Economies of scale• Know how synergies• Capacity use optimisation

• However this option is uncertain given• Perspective of loss of competitive advantage (For large insurers everything is core)• Trust amongst insurers (Will the “partner” undermine them)• Threat of having a strategic dependency• And generally collaboration amongst insurers is quasi-novel in the industry, though Zurich offers

claims management and Allianz offers underwriting and claims management for example• In the current market, most insurers have consolidated and developed IT infrastructure and may

now be placed to insource and leverage their scalable platforms

LOR

• LOR is the art of mitigating risk at pricing per unit and discipline

• Given intense competition, appreciation of the underwriting cycle, balancing GWP land grab (greed) vs. profitable business long-term growth is a fine balance, but one the would well be worth thinking through

• Discipline when ‘all others lose their head’ in the hard cycle• Focus should be in developing superior skill in calculating accurate prices

• In doing so they will be able to outperform their competitors by a wide margin over the horizon

• Insurers that chase market share and fail to develop skill will find themselves faced with adverse selection, an inability to grow profitably or remain the same size profitably, and a poor ability to shrink their way to better profitability when phase 2 of the market comes

• Reinsurance as a tool to write more business and get more experience• Turkish GI is heavily reinsured which impacts profitability structures

• Some companies appear to be innovating in this area• Higher cession proportion would allow insurers to write greater volume of business and

mitigate inevitable claims• Is there a balance?

• Questions• Reinsurers with the highest credit rating benefit from having sight of more business and

understand the market better as a result. How can insurers do this?• Can’t own brokers/agencies to get increased volume (See law summary)

• How can you get more data from customers?

OVERVIEW

• When an insurance company with a quality brand offers lower prices, it now has a better chance of gaining new business than in the past, but this can only be sustained if the lower prices are the result of more accurate pricing skills, meaning the VNB is profitable

• Ultimately, more accurate pricing is more important that a quality brand• Insurers can grow rapidly and produce an excellent loss ratio even though its brand is only

modestly useful• Over time, companies with most accurate pricing may end up with the best brands

• There are a number of tactics and strategies for insurers to undertake to expand market share, around gaining distribution channels, preparing itself to participate in the inevitable wave of consolidation arising from phase 1 and its conceivable “mispricing cycle”

• However they inevitably involve playing the same game as competitors, which will likely be an expensive one

• The best course of action is twofold:• A combination of moderation in direct expansion by offering favourable distribution terms and

engaging in expensive acquisitions • A zealous focus on creating a competitive advantage in the underwriting systems, as over time

this will lead to profitable business being written, which self-perpetuates and self-funds expansion

• Acquisitions are not on a financial basis the best course of entering the market, or expanding market share, as valuations have risen exponentially, and in essence, ‘there are no good deals left’

• The sell side realises long-term potential and the multiple reflects that, the buy-side still likely smarting with capital constraints retains the bargain hunting mentality

• Investment banking advise emphasises the need for ‘deep pockets’

PARTNERSHIPS• Partnerships with as many touch-points amongst distribution channels are imperative to deal

with fierce competition

• Partnerships will play a significant role and incumbents are actively looking for them, such as Aksigorta

• Press statement enunciating their desire for a leadership position and will sell no more than 50%• However, distribution is being bought up in the bank channel by competitors such as BNP;

insurers must therefore seek to differentiate themselves and secure mutual agreements• Whilst traditionally “loose” strategic partnerships may be preferred to tie up distribution, JVs

which also may have been viewed as unrealistic are necessary (and may hopefully serve as a basis to creep up to 100% control)

• The main focus of the JV is to leverage the existing client base• The market is now difficult to enter and more recent entrants are already being rumoured to be

takeover targets.

• New entrants with small war-chests will be required to align themselves, but given the paucity of players, this is unlikely. Furthermore, those left have stated they will only do so if they are assured a commanding position in the market

• Structurally, the market does not lend itself to immediate profitability; unemployment is high and research has illustrated that insurance is neither seen as a necessity or even a good thing underpinning the dubious status as the lowest penetrated market in Europe

• The ‘informal’ economy, according to some estimates, is in the region of 25% of GNP• Employers still evade paying social security contributions for their employees, for example, by not

registering them or adjusting categories in their favour- such as smaller salaries and contract basing• Having said that, the late development of the market has facilitated best-practice to some extent

• In comparison to another growth nation, Russia, the tax system is a marginally more favourable, the regulatory environment is well-advanced, products transparent and consumers with more of a long-term focus

CONSOLIDATION• Given the level of competition in the market and empirical evidence that GI is inherently cyclical in

nature, consolidation at some point is inevitable

• Analysis of EOR provides prima facie evidence that there are benefits of scale

• The basis for consolidation is somewhat difficult in the short term, given: • The majority of domestic players have been bought or have aligned themselves• Macro trends for foreign entrants domestic markets are poor, pulling them to growth markets

• There are therefore little to no low hanging fruit to commence a wave of consolidation, and foreign players will only exit if losses become unpalatable and/or some exogenous events happen, such as corporate distress requiring divestments (UK banks)

• In the absence of deals, there have been many cases of foreigners buying out partners, such as in 2008 with Allianz and Koc and AXA with Oyak for $525 for the remaining 50%

• At present, foreign entrants are taking a long term perspective. Whilst penetration may be low and market share fragmented, they will be content with small % holdings, expecting penetration to increase and other benefits, such as compulsory insurance expanding in scope and take-up thereof, thereby benefiting players that have been incumbent for a number of years

• Two of the largest players, AXA and Allianz have been in the Turkish market since 1998 and 1988 respectively, the longest of any other foreign player

• Likely consolidation will benefit those with the greatest resolve. Many entrants are dominant globally and fall into the camp of wanting to rapidly gain market share, which impacts LOR, and to get to ~15% will cost them, with no certainty that the investment will pay off

• Those remaining Turkish players may eventually be lured away from going it alone• Yapi Kredi received overtures in August 2008, but a deal was not consummated

• The market will eventually consolidate to a handful of players, they will be those companies who have established a great distribution network across channels, strong brand equity and are inherently profitable

• A similar situation is envisaged in the pension market where only 4 players will be believed to be left standing, at the end of the day

analysis of the turkish general insurance market a d jarvis

Business

life insurance companies

general insurance companies

foreign insurance companies

general insurance market

inactive insurance companies

compulsory insurance

nonlife insurance

companies group